When intending to set up a business in Lithuania, first decide what legal form of enterprise is the most suitable to achieve the goals of your company. An enterpreneur needs to assess what economic-commercial activities will be selected for the enterprise to do business in (see CLASSIFICATION OF ECONOMIC ACTIVITIES- EVRK, 2nd edition), also, to envisage the quantity of hired empolyees, amount of the initial capital necessary to start the business, etc.
The laws of the Republic of Lithuania provide for the incorporation of the following legal forms of enterprises: sole proprietorships, general partnerships, limited partnerships, public limited liability companies, private limited companies, investment companies, agriculture companies, cooperative companies, public and municipal enterprises. In cases when the goal of the company is not to make a profit, a non-profit organization may be established.
Enterprises of all forms are divided into limited and unlimited liability companies. Sole proprietorship and general partnerships are considered as unlimited liability companies, however, all other forms (types) of enterprises are limited liability companies.
Limited liability companies are liable for their obligations solely within the company assets. Unlimited liability companies are liable for their obligations over the company assets, i.e. if the obligations exceed the company assets, in a sole proprietorship – the owner, and in a general partnership- each general partner, are all personally liable for any legal actions and debts the company may face.
If you, as a company owner, plan to render services or have a small business, which involves yourself and your family members, requires a relatively small initial capital, you may establish a sole proprietorship (IĮ).
The incorporation, management, performance, reorganization, liquidation, owner‘s rights and duties of IĮ are governed by Law on Sole Proprietorships of the Republic of Lithuania, dated 1st January, 2004.
Only one capable natural person can be the founder/ owner of IĮ. Law on Sole Proprietorships introduced a restriction for owners of one IĮ to become the owner of another IĮ, because the owner of IĮ has total and unlimited personal liability for the debts incurred by his/her business.
Founder of IĮ becomes its owner from the moment of the legal registration of the company. Regulations of IĮ may provide for a case when the owner may designate another person as company manager. Regulations of IĮ is the incorporation document in the company, its governs all activities of IĮ.
IĮ has the following benefits: the business may keep simplified accounting, for IĮ it is not necessary to prepare financial statements, it is enough to fill in the tax return declaration. Owner of IĮ may do business by himself or with help of his family members, i.e. he/ she is not obliged to hire employees or conclude employment contracts.
Major weakness of IĮ is in owner‘s liability at business risk. IĮ is an unlimited personal liability legal entity. Assets of IĮ are not separated from the owner‘s own property. Thus, the owner of IĮ is liable for all the debts of IĮ personally. Therefore, he/she needs to evaluate all risks related to the quality of services or works, their deadlines, suppliers etc. At failure to fulfill IĮ obligations to the customer, state, social security office, or other creditors from the company aassets, fulfillment of the obligations are directed to the owner’s property. IĮ debts are not written off. Before registration of such a legal type of a company, one must evaluate all pros and cons.
The name of IĮ must comprise words „individuali įmonė“ (lt.) determining its legal form or its abbreviation IĮ (lt.)
Law on Sole Proprietorships states that IĮ may be reconstituted into a public limited liability company, a private limited company, or a public institution. IĮ may not be reorganized, except for the cases when the IĮ is inherited by a person who already is an owner of another IĮ, and cases when IĮ, established before 1st January, 2004, and owners of which are a married couple (both spouses), is being reorganized.
Sole proprietorships (personal enterprises), established before 1st January, 2004, names of which include the words personalinė įmonė, their abbreviation PĮ, also IĮ, the names of which do not indicate their legal form, starting from 1st January, 2004, are considered as sole proprietorships.
Owners of IĮ, owning two or more IĮs, before 31st December, 2005 have to merge these companies into one IĮ, or, leaving one IĮ, must reorganize, transfer or liquidate the rest of their companies, according to The Civil Code.
IĮ, the name of which indicates both spouses as owners, before 31st December, 2005 must accept a decision regarding one owner of IĮ, or reconstitute the IĮ into a public limited liability company, a public institution or a general partnership, or reorganize it into two IĮs by the way of division, or transfer it to another person, or liquidate it.
If for starting a business company one person with his/her efforts and funds is not enough, and he/she needs to use business partners, a partnership may be established.
Benefits of a partnership are as follows: a partnership does not necessarily need to hire employees under employment contracts, as partners may work there themselves according joint venture agreement, a partnership may keep simplified accounting, and laws do not regulate the minimum authorized capital of a partnership. However, when founding a company of such a legal form, one must evaluate all risks and take into account the fact that a partnership is unlimited liability legal entity and that its assets are not separated from the personal property of its partners..
Partnerships in Lithuania may be of two legal forms (types): general partnerships (TŪB) and limited partnerships (KŪB).
Incorporation, reorganization, liquidation, management and performance of partnerships, rights and duties of their partners are regulated by Law on Partnerships of the Republic of Lithuania and joint venture agreement, by which both TŪBs, and KŪBs are founded.
A partnership is a form of business company, which is established by two or more natural or legal persons, under a joint venture agreement, for the common goal of making profit, under a common company name, joining its partners‘ own property into joint partial ownership. The name of a TŪB must include the name of at least one of its partners. The name of KŪB must indicate the name of at least one of its partners and include words komanditinė ūkinė bendrija or their abbreviation- KŪB.
A partnership may include from 2 to 20 partners. Public authorities, public administration and control institutions, courts of law may not be partners in a general partnership. Public and municipal enterprises may not be partners in a TŪB, however, they may be comandite (trust) partners in KŪB.
A TŪB is comprised from general partners, acting under a common company name. All general partners of a TŪB are liable for TŪB‘s obligations jointly and severally with all of their assets. TŪB is not liable for obligations of its partners, not related to the company‘s assets.
A KŪB is comprised from general partners and comandite partners, acting under a common company name. Minimum one general partner and minimum one comandite partner may comprise a KŪB. KŪB‘s assets are separated from the property of comandite partners, however, not separated from the property of general partners. For obligations of KŪB the general partners are liable jointly and severally with all their assets, but comandite partners are liable only up to a the part of their property, transferred to KŪB under agreement.
Joint and several liability of the partners means that creditors of a partnership may apply their claims both to the assets of the partnership, and to the assets of the partner/ partners.
Incorporation and operating basis of a partnership is its joint venture agreement. It must provide for: the name of the partnership, its goals, general partners and comandite partners, their rights and duties, their shares in common property, procedure on cash withdrawal from the cash register, rules on distribution of gains and losses, conditions and procedure on withdrawal and removal of general partners and comandite partners, admission of new members, management rules of the partnership, authorized persons and their powers, procedure on adopting resolutions and other provisions not inconsistent with law. Therefore, the partners establishing this type of a company, must prepare the agreement very thoroughly. Joint venture agreement must be certified by a notary.
All general partners can participate in the management of a partnership. Every general partner of a partnership has a right to represent the partnership and make decisions regarding management, use and diIĮosal of its assets. In decicion-making every partner has one vote, regardless his/her share size in the common property.
Comandite partners cannot participate in the management of a partnership, i.e. they do not have a right to represent the partnership and participate in its decision-making regarding performance of the partnership, except for the cases when such participation is provided for by joint venture agreement.
Small partnership is a limited liability private legal entity. That means, partners are not liable for obligations of the small partnership personally. (Small partnership may have from 1 to 10 partners (natural persons)). Small partnership may conduct any legal activity. See more: REFERENCE and REFERENCE
Public limited liability company and Private limited liability company
For a business related to higher economical risk, it is better to establish a limited liability legal entity- a public limited liability company (AB) or a private limited liability company (UAB), i.e. the companies of such legal forms, which are liable for their financial obligations within the company assets. A shareholder of such company risks only by his share in the company, if the business fails.
Incorporation, reorganization and liquidation, management and performance, rights and duties of its shareholders, are regulated by Law on Limited Liability Companies of the Republic of Lithuania.
For provisions in reference to AB and UAB, a term „company“ will be used.
Law on Limited Liability Companies sets common and distinctive features of AB and UAB, such as establishing and capital formation method, requirements for founders and shareholders, management and control bodies. As founders of company natural and legal persons may act, both from the Republic of Lithuania, and abroad.
Company is an enterprise, whose authorized capital is divided into shares called stock. Company is a limited liability legal entity. Company‘s assets are segregated from the assets of the shareholders. The shareholders are usually liable for any of the company debts that beyond the company’s ability to pay. Meanwhile, the limit of their liability extends only to the face value of their shareholding.
Founding a AB and a UAB, persons combine their funds (capital) for joint operations.
AB authorized capital shall not be less than 40 thousand EUR. Shares of such company shall be distributed and traded in stock exchange publicly, according to public circulation of securities legislation.
UAB authorized capital shall be minimum 2.5 thousand EUR. Shares of such company shall not be distributed and traded publicly.
As AB has a right to distribute its shares publicly, it has a right to use various information channels and sell its shares to any natural or legal person. Distribution of UAB shares is strictly limited by law, thus the potential resources (capital sources) for UAB is narrower.
Founders of the company conclude the company incorporation agreement, if the founder is a single person- he by himself signs the founder‘s act. The agreement entitles the company to open a savings account of a newly established company in any bank registered in the Republic of Lithuania, and, in case of incorporation of AB- gives the right ro register shares in Securities‘ Commission.
The shares of the newly established company shall be signed by the company’s founders. After all the original contributions for the shares have been paid, before the registration of the company, the founders of the company shall convene a constituent assembly. Constituent assembly approves the joint-stock company statutory report, elects audit company, elects members of management bodies, solves other general meeting issues. After the constituent assembly the company shall be registered in the Register of Legal Persons. Starting from the moment of registration the company is considered incorporated and acquires the rights of a legal entity.
Law on Limited Liability Companies sets that, at incorporation of a AB, the initial contributions for the signed shares payable only in cash to the savings account of the founded company. The funds in this bank account may be used by the company only after its registration moment.
Any natural and legal persons of the Republic of Lithuania and from abroad, who have legally purchased at least one share of this company become shareholders of a company. Each shareholder in a company has rights equivalent to the shares of the company owned.
The company is leading its activities based on its Articles of Association, which is its major legal document.
Company management bodies are as follows: general shareholders‘ meeting, supervisory board, management board and head of administration. AB mandatory management bodies are general shareholders meeting, head of administration and at least one collegial management body- supervisory board or management board. UAB mandatory management bodies are general shareholders meeting and head of administration. In UAB supervisory board and management board are not mandatory.
The essential feature of AB and UAB- the shareholders have as much influence, as many company‘s shares they hold. The most important decisions, including the formation of the executive body, shareholders adopt by voting, and the number of votes directly depends on the shares held.
AB and UAB manage their accounting based on the principle of double entry which requires thorough accounting knowledge and professional qualified bookkeepers. At the end of the financial year, before annual general shareholders‘ meeting, in all public limited liability companies an elected auditor must verify the financial statements.
In private limited liability companies audit shall be carried out, if if they satisfy at least two of the following:
- Sales revenues in excess of 3.5 million EUR over the financial year;
- The average number of employees during the financial year is not less than 50;
- Company assets in balance in excess of 1.8 million EUR
A Co-operative company (KB) is a jointly owned enterprise engaging in the production or distribution of goods or the supplying of services, operated by its members for their mutual benefit, typically economic, social and cultural, established by natural and (or) legal persons according to the laws.
Its members contribute funds to form its capital, share risks and benefits according to the goods and services turnover in the company, and actively participate in the management of the KB.
KB is a limited liability legal person. KB assets are segregated from the assets of its members. KB is liable for its obligations only up to the limits of its own assets. A member of KB in accordance with obligations of the KB is liable by his share payable in the company. KB shall consist of minimum 5 members and has a name. Its name shall include words kooperatinė bendrovė or kooperatyvas. KB has a right to:
- engage in activities compatible with the law and purposes, specified in the Articles of Association;
- open its bank accounts in the Republic of Lithuania and banks abroad;
- manage its own property, use it and dispose of according to law;
- join cooperative alliances, also join other organizations according to other laws;
- enter into transactions, assume property obligations;
- identify prices, rates and tariffs of its products, works and services;
- borrow funds from its members under contract according to the Articles of Association;
- determine its organizational structure, establish branches and representative offices, be founder of other companies and organizations.
- Incorporation documents of KB are the Articles of Association and the incorporation agreement. The Articles of Association is the document by which the KB is guided in its activities.
- KB founders must consist of at least 5 natural and (or) legal entities. Each KB founder must become a member. The KB founders conclude the KB incorporation agreement, prepare a draft of Articles of Association, convene a constituent assembly. Incorporation agreement is a public document.
Legal basis for KB activities is the company’s Articles of Association, prepared by the founders and adopted in the constituent assembly. Any natural and legal persons from the Republic of Lithuania and abroad may become members of a KB.
Incorporation and performance of Co-operatives is regulated by Law on Cooperative Societies (Cooperatives) of the Republic of Lithuania.
If a person or group of people wish to work in social, educational, scientific, cultural, sports or other similar areas and if their goal is not to make profits, they may choose to establish a non-profit organization, which may be public institutions, associations, charity and support funds, public organizations. The most popular non-profit organization is a public institution (VšĮ), because it is the only non-profit organization, which can carry out economic and commercial activities. VšĮ is a public legal person who does not seek to benefit themselves, and its profit cannot be distributed between the founders, members, shareholders.
Public institutions may be founded by natural and legal persons from the Republic of Lithuania and abroad. The number of founders is not limited. Public and municipal institutions may transmit any state (municipal) property to a VšĮ only on a use basis. Here are some distinctive features of VšĮ:
- Institutions may act in social, educational, scientific, cultural, sports, business support or other similar areas;
- institution can generate income for the activities provided for in the articles of association of public institutions, but it may not distribute the profits to its shareholders (the owner), so most of the revenue is used to develop the core business;
- Institution can receive charity in the form of material and financial support.
Law on Public Institutions of the Republic of Lithuania sets incorporation, management, performance, reorganization and liquidation procedures of VšĮ.
Law on Associations of the Republic of Lithuania sets procedures of management, operation, reorganization and liquidation of associations.
European Economic Interest Grouping
Since 1 May. 2004, Law on the European Economic Interest Grouping of the Republic of Lithuania (hereinafter – the Law) became effective. This law applies to the European economic interest groups with headquarters in the Republic of Lithuania (hereinafter – EEIG). The law ensures the application of EU Council Regulation No. 2137/85 on the European Economic Interest Grouping (hereinafter – Regulation), dated 25 July. 1985, in Lithuania.
European Economic Interest Grouping is a private legal entity, which aims to help its members to pursue or expand economic activity, to achieve better performance, but its purpose is not to make profits. Therefore, EEIG is not allowed:
- Directly or indirectly to participate in the management or supervision of its members’ or other corporates’ activities, particularly in human resources, finance and investment areas;
- Directly or indirectly, on any grounds to hold shares; to hold shares of other companies is allowed only to the extent necessary to achieve the objectives of the group, and only if it is done on its members’ behalf;
- To hire more than 500 employees;
- Be a member of another European Economic Interest Grouping etc..
EEIG members may be companies and other legal persons with a registered office and central administration in the territory of the EU. EEIG members can also be natural persons engaged in industrial, commercial, craft or agricultural activity or who provide professional or other services in EU.
As for the number of members of the EEIG must consist of at least:
- Two companies or other legal entities, which have their central administrations in different EU member states, or
- two natural persons who have their principal activities in different EU member states, or
- a company or other legal entity, the central administration in one EU member state and the person who has his principal activity in another EU member state.
Parties, willing to join to EEIG, must enter into a EEIG incorporation agreement. The incorporation agreements with other documents must be submitted to the State Enterprise Centre of Registers, which manages the Register of Legal Persons. EEIG registration procedure is governed by the Register of Legal Persons (Amendments to the provisions on the EEIG registration will be confirmed shortly). From the date of registration of legal entities EEIG can register their name, to have all the rights and obligations, to conclude agreements and to perform other legal actions. EEIG members have unlimited joint and several liability for its debts and other obligations.
EEIG incorporation agreement must contain: the name of group, the official address of the group, objectives of the group, activity period of the group (if limited), each group member- natural person’s name, the legal entity name, legal form, permanent address, registration number and place.
The official address must be in the EU.
Such registration name of the group must contain the words Europos ekonominių interesų grupė or its abbreviation EEIG.
Regulations and legislation do not set minimum capital limit of the EEIG.
The group’s operating profit is considered as profit of its members and is distributed to them in parts, indicated in the EEIG incorporation agreement, and if this is not indicated in the agreement – in equal parts. Any member of the group may transfer his part to another Group member or a third party, fully or partially, but only with a unanimous agreement of the other Group members.
The EEIG does not pay income tax, and its performance taxation is transferred to the participants. Therefore, the group’s performance taxation is distributed to its members, as well as profit gained and expenses incurred. Revenue share:
- in case of a group member is a resident person of the Republic of Lithuania, is subject to ordinary personal income tax as stipulated by law;
- in the case of a group member is a legal entity, is subject to income tax according to Law on Income Tax of the Republic of Lithuania.
Activities of groups are subject to the Republic of Lithuania law governing limited partnerships’ responsibilities, insolvency, liquidation, to the extent permitted by the Regulation and the said law.
The law allows the incorporation of EEIGs since May 1 st, 2004, but in fact EEIGs will be allowed to be set up only after the amendments of Register of Legal Entities will come into force.
If for your company’s business expansion Lithuanian market is not enough, and you want to develop business in other EU countries or to unite several countries operating in the corporate governance structure, we recommend to establish a European company (SE, French. Societas Europaea). SE with headquarters in the Republic of Lithuania is governed by the Law on Public Companies of the Republic of Lithuania, and the legislation governing the activities of AB. The aforementioned law ensures implementation of European Council Regulation No. 2157/2001, dated on 8 October, 2001, “Regarding the European Company Statute” in Lithuania.
SE may be formed in one of four possible ways: by way of merger, by establishing a management (holding) European company, by establishing a subsidiary SE, by transforming an operational AB into a SE. In the incorporation of an SE, companies of at least two EU member states must participate.
The authorized capital of SE shall be no less than 120 thousand EUR. The authorized capital is divided into shares. SE shareholder’s liability shall not exceed the limits of his shares.
The law provides that the office of the SE must be in the EU territory, in the same state where it has its headquarters – its permanent governing body location. However, the office may be transferred to another EU member state.
Formal SE feature – the name of a company begins or is followed by the abbreviation SE.
According to the management form approved in its Articles of Association, the SE can be controlled in accordance with a two-tier or one-tier management system.
Although the SE requires considerable initial capital, however, this legal form allows to search your company for with the most favorable environment, because the fees are paid according to the laws of the state where its registered office is. SE keeps accounting of one company, so you can reduce administration costs, legal expenses, which are resulted in due to differences in the legal environment.