ProspectiveProspective
2.1. Individual enterprise
2.2. Private company and private limited company
2.3. Farming partnership
2.4. Non-profit organizations
2.5. Cooperative company
2.6. Farming partnership
2. Legal forms of companies
3. Is it necessary to found a company?
Having a clear vision of his activity, a person starting a business should decide what form of activity to choose. Thus, basically you have to choose whether do business by individual activity or to establish a corporate entity. Such a decision depends on many circumstances. It is possible to decide what form of activity to choose in accordance with these criteria:
1. Character of activity. What activity is planned to execute in particular? That is, the decision relies on the complexity of activity, its extent and other circumstances related with the concrete target activity.
2. Size of available capital. A specific size of the authorized capital the founder must have is designated to establish certain types of corporate entities.
3. Taxes. The size of payable taxes directly depends on the form of activity the person has chosen.
4. Level of responsibility. If a person intends to restrict his responsibility and not to pay the penalties for the failures of business with his private or family assets, he should choose a corporate entity of a limited civil liability.
5. Number of founders. If there are several or more concerned persons who want to undertake particular activity together, you should pursue that activity by establishing a corporate entity.
6. Level of complexity of the activity. To engage in individual activity is simpler, that is, you do not have to establish the structure of management of a corporate entity or go through other formalities essential for corporate entities.
When you want to found a company, first of all decide what legal form (type) of the company is the most relevant in fulfilling your chose goals. You have to evaluate what economic commercial activity you are going (The classificator of types of economic activities), how many employees will work at the company, what size of the authorized capital is needed to start the business, etc.
In Lithuania, the following legal forms of companies can operate:
- Individual enterprise (IE);
- Closed Joint Stock Company (CJSC), Joint Stock Company (JSC);
- general partnerships (GP), limited partnerships (LP);
- municipality companies (MC), state companies (SC);
- cooperative companies (cooperatives);
- farming partnerships (FP);
- European Economic Interest Groupings (EEIG);
- European Enterprises (SE);
- European Cooperative Companies.
In accordance with the Civil Code of the Republic of Lithuania (hereinafter – CC), all these business organization forms are entitled the status of corporate entity.
Individual enterprise
Individual enterprise (IE) is a private corporate entity of unlimited civil liability, i.e. the members of such a corporate entity are subsidiarilly responsible under obligations of such a corporate entity when the assets of the corporate entity are insufficient to fulfill these obligations. The company of this type can belong to one natural person under the right of ownership or to several natural persons – spouses – under the right of co-ownership.
IE has a one-man governing body – manager. The owner of the IE is also the one-man governing body and the head of the IE, however the regulations of the IE might assess differently. The founding of IE is regulated by CC and the Law on the Individual enterprises of the Republic of Lithuania.
IE has the following advantages:
The establishment of the company of this legal form is convenient for the beginning of small business as the legal acts do not require minimum starting capital.
The company can conduct a simplified accountinga; it does not necessarily have to structure the financial accountability, to fulfill the tax declarations would be enough.
In his company, the owner of IE can work all by himself or with the help of his family members, i.e. he does not have to employ other workers and draw employment contracts.
The main disadvantage of IE is that IE is a corporate entity of unlimited civil liability, and the assets of IE are inseparable from the assets of the owner of the company. Therefore, the owner of the company warrants the liabilities of IE by all his private assets. If the liabilities to the client, the state, the institution of social insurance or other creditors are not covered from the assets of the company, the enforcement of liabilities is directed to the assets of the owner. The debts of IE cannot be withdrawn.
Before registering a company of this legal form, it is essential to evaluate all the pros and cons.
The name of the IE must include words indicating its legal form – "individual enterprise" or its abbreviation "IE". The law on sole proprietorships designates that IE can be restructured to Joint Stock Company, CJSC, and public enterprise if the asset of IE less the liabilities of the Individual enterprise is smaller than the minimum size of the authorized capital for a Joint Stock Company or Closed Joint Stock Company set in the Law on the Joint-stock companies of the Republic of Lithuania. IE cannot be reorganized, except the cases when IE is inherited by the owner of another IE or when an IE, established until 1 January 2004 and owned by spouses, is being reorganized.
Since 1 January 2004, individual (personal) enterprise, founded until 1 January 2004, the name of which includes the words "personal enterprise" or its abbreviation "PE" as well as IE the name of which does not specify the legal form are considered individual enterprise.
Private company and private limited company
The foundation, activity and termination of JSC and CJSC are regulated by the Law on the Joint-stock companies of the Republic of Lithuania. The company is the private corporate entity of limited civil liability whose authorized capital is divided into parts called shares. The assets of the company are separated from the assets of the shareholders. In accordance with the liabilities of the company, shareholders warrant only that sum of money they are obliged to pay for the shares. However, in cases when the company becomes incapable to warrant according to its obligations because of dishonest actions of a shareholder, the shareholder will be subsidiarilly responsible, that is, the creditor of the company will only be able to put forward a demand to the shareholder when such a demand has been made to the company but the company has rejected to satisfy it or has not responded at a right time.
All natural and legal persons of the Republic of Lithuanian and other countries can be the founders of a company and must necessarily acquire shares of the company being established. The maximum number of shareholders for CJSC is 249; the number of shareholders for JSC is unlimited.
The law determines the following requirements for the minimum authorized capital: the minimum authorized capital for CJSC must be not less than 10 000 litas, while the minimum authorized capital for JSC must be not less than 150 000 litas.
JSC shares, differently from CJSC shares, can be distributed sold publicly on the basis of legal acts, regulating the market of securities. This property, in particular, most often conditions the choice of JSC as a form of the company.
The popularity of JSC, if compared to other companies, is conditioned by several reasons. Firstly, CJSC is a corporate entity of limited civil liability. This means that a shareholder warrants only that sum of money he paid for the shares. Therefore, a person having a required minimum-authorized-capital-sized sum of money (10 000 litas) can start a business establishing CJSC and not taking risks in his own or his family wellbeing (the case in JSC or FP). This form of business organization is also considered most favorable for the decision-making mechanism of the substantial company matters. Each share awards one vote, as a result, a person owning most of the shares will have a critical power in the general meeting of shareholders.
Farming partnership
If the efforts and funds of a sole person is not enough to start an economic commercial activity and you need to rely on business partners, then you could establish a partnership.
The advantages of farming partnership are the following:
- in partnership, workers do not have to be necessarily employed by employment contracts; in partnership, general partners can work under joint working agreement;
- partnership can manage simplified accounting;
- legislature does not regulate minimum equity capital of a partnership.
Nevertheless, when establishing a company of this legal form (type), one needs to measure economic risk and consider that partnership is a corporate entity of unlimited responsibility and its assets are inseparable from the assets of its members.
General partnerships can be of two legal forms (types): General partnerships (GP) and limited partnerships (LP). The establishment, reorganization, liquidation, management and activities of partnerships, rights and duties of members is regulated by the Republic of Lithuania law of partnerships and joint activity contracts, which is the basis for the establishment both of GP and LP. Partnership is a company of joined property founded by several natural or legal persons or founded under the joint activity contract to conduct economic-commercial activity in the general name of the company. The name of GP must indicate at least one of its members. The name of LP must indicate at least one of its general partners and include words 'limited partnership" or its abbreviation "LP". Not fewer than 2 and not more than 20 members must constitute a general partnership. State government, institutions of governance and control, courts cannot be members of a partnership. State or municipality enterprises cannot be members of GP, while in the LP, they can be limited partners.
GP is comprised of general partners acting in the general name of the firm. In accordance with the liabilities of the GP, its members warrant solidarily with all their assets. GP is not responsible for its members' liabilities unrelated to the assets of the partnership.
LP is comprised of general and limited partners acting in the general name of the firm. The assets of the LP are separated from the assets of the limited partners and unseparated from the assets of the general partners. In accordance with the liabilities of the LP, its general members warrant solidarily with all their assets, while its limited partners warrant only with that part of their assets they sold under the contract to LP.
Solidarily responsibility of members implies that a creditor of a partnership can direct his requirements to the assets of a partnership as well as the assets of any member or several members of the partnership. The basis of establishment and activity of a partnership is a joint activity contract. It must indicate: name of the partnership, its goals, general and silent partners, their rights and duties, portions of general and silent partners in the joint property, order of money withdrawal from the chest, rules for income and loss distribution, conditions and order of dismissal and deposition of limited partners and admission of new members, rules for management and control of the matters of a partnership, persons authorized to represent a partnership and their authorities, order of resolution-making and other provisions within the laws. Therefore, persons intending to found a partnership should carefully prepare the contract. The joint activity contract is justified by a notary. The general partners run the management of a partnership. Every general partner of a partnership has a right to represent the partnership and deal with matters of holding, use and disposal of wealth. In the making of a resolution, a general partner has one vote regardless the size of his portion in the joint property. Limited partners do not partake in the management of a partnership, that is, they do not have a right to represent the partnership and participate in the making of resolutions on the activity of the partnership, except the cases when such participation is provided in the joint activity contract.
Non-profit organizations
If a person or group of persons wish to work in social, education, science, culture, sport or other similar fields and if their goal is not profit-making, it is possible to establish one from non-profit organizations, a public agency, association, aid and charity foundation, public organization.
The most popular non-profit organization is public agency (PA), as it is the only non-profit organization able to conduct economic commercial activity. PA is a public corporate entity which does not seek for benefits and cannot distribute the profit for founders, members or partners. PA can be established by natural and legal persons of the Republic of Lithuania and other countries. The number of founders is unlimited. State and municipality institutions can transfer the assets belonging to the state (municipality) institutions to PA only on the loan for use basis.
Some exceptional features of PA:
- institutions can run in social, education, science, culture, sport, business promotion and other similar fields;
- an institution can receive revenue for activity provided in the by-laws of the public agency, however, it cannot distribute the profit for its partners (owner), therefore, the biggest part is used to develop the major activity;
- an institution can receive material and financial support.
Law on the Public Companies of the Republic of Lithuania sets the order for the establishment, management, activity, reorganization and liquidation of PA.
Cooperative company
Cooperative company (CC) is a company established by natural and (or) legal persons in accordance by the order set by the legislature to satisfy economic, social, cultural needs of the members. Its members provide finance to amount the capital, allocate the risk and benefit among themselves with reference to the turnover of member goods and services with the company and actively participate in the management of CC.
CC is a corporate entity of limited civil liability. The assets of CC are separated from the assets of its members. In accordance with the liabilities of the CC, its members warrant with their assets only. In accordance with the liabilities of the cooperative company, a member of CC warrants the shares liable to the share contribution. CC has not fewer than 5 members and its name. The name must include the words "cooperative company" or "cooperative".
CC has a right:
- to conduct an activity within the laws and goals set in the by-laws of the company;
- to have accounts in the banks of the Republic of Lithuania and other states;
- manage, use and dispose assets within the laws belonging under the right of ownership;
- join into alliances of cooperative companies, in addition – into other organizations by the order provided in other legal acts;
- conduct transactions, accept financial liabilities;
- set prices, tariffs and rates of its production, works and services;
- borrow finance from its members on the basis of the contract by the order of the by-laws of CC;
- determine its organizational structure, establish subsidiaries and agencies, be the founder of other companies and organizations.
The instruments of incorporation of CC are the by-laws and the contract of establishment. The by-law of CC is a document CC follows in its activity. Each founder of CC must become its member. The founders of CC draw instruments of incorporation draft the by-laws of CC, convene the constituent assembly. The instruments of incorporation is a public document. The legal basis for the activity of CC is the by-laws of the company the founders formulate and adopt in the constituent assembly. Lithuanian or foreign natural and legal persons can be members of CC. The establishment of CC is regulated by the Law on the cooperative companies of the Republic of Lithuania.
Farming partnerships
The main provisions of the establishment and regulations of farming partnerships (FP) are provided in the Law on the farming partnerships of the Republic of Lithuania. A company established for the productive and commercial activity is considered a FP if its income for the agricultural production and provided services to the agriculture in an economic year amounts to more than 50% of all the realized income.
FP is a corporate entity of limited liability, the assets of which are separated from the assets of its members and the liabilities of shareholders unrelated with the activity of the company.
Two types of participators can be in a FP: members of the company and shareholders. The minimum number of participators in a FP is 2. The shareholders and members of FP differ only in that shareholders do not have a decisive vote in the meeting of the members of the company. The assets of all the participators are separated from the assets of the company.
3. Is it necessary to found a company?
The Civil Code and the Law of inhabitant income tax of the Republic of Lithuania give the right to exercise individual activity without establishing the company. We recommend this form of activity if you are capable to implement the business idea alone and, especially, if you plan to conduct the economic commercial activity a limited period of time.
Individual activity is:
- independent commercial or productive activity of any character, including the one conducted under business licence (production of textile goods, repair works, etc.);
- independent creation, professional or other independent activity of similar character, including the one conducted under business licence (lawyers, notaries, etc.);
- independent sport activity;
- independent performer activity (actor, musician, etc.).
You can choose:
- to undertake individual activity without the acquired business licence;
- to undertake individual activity under the acquired business licence.
Individual activity without the acquired business licence:
A certificate of individual activity is a document which confirms that you can conduct the provided independent activity, by which you seek to obtain income or other economic benefit and which demands continuity, unlimited period of time. Basically, you can undertake any type of economic commercial activity (excluding the list of licence marked activities only corporate entities can conduct). The taxes are paid from the income of the activity after the end of the taxable period.
Individual activity under the acquired business license:
Business licence is a document which confirms that you have paid a fixed tax for the business licence and you are able to conduct the provided independent activity, sell goods of your own manufacture, and provide services to residents and corporate entities a certain period of time. Business licences are granted only to certain types of activities (the list of activities able to be conducted under the acquired business licence).
Sponsorship of commercial activity
Do you have a magnificent business idea? Decided to found your own company? First of all, evaluate what investments are needed for the implementation of the business project, think, whether your own finances would be sufficient or perhaps you will have to look for additional sources of sponsorship. Thus, you have to devise a business plan by which you will be able to ground the profitability of your idea and draw your potential investor's interest.