10 Reasons Why a Small Partnership (MB) Is Not Suitable for Start-Ups
During the years, Startup Lithuania team has got various questions from startups, what legal entity is suitable for their new business. So today our partner TRINITI – Pan-Baltic business law firm, wants to share their insights why a small partnership (MB) is not suitable for Start-Ups.
First of all, only natural persons can be members of an MB, which means that legal persons are prevented from investing in MBs (Articles 2(1), 3(3) and 7(1) of the Republic of Lithuania Law on Small Partnerships (hereinafter – the Law)).
Second, the MB legal entity form is meant for small businesses, as well as for those who know each other well and want to participate in the management and activities of the MB (this is even specified on the website of the Ministry of Economy of the Republic of Lithuania). An MB can have a maximum of 10 members. This creates an obstacle for expanding and attracting more investors (Articles 2(2) and 3(3) of the Law).
Third, if it turns out at the end of the year that the MB operated at a loss, then the members of the MB are required to repay all amounts/advance payments that they had taken out of the MB prematurely or received as advance profits. The vast majority of start-ups are unprofitable for many years in a row, since they are initially looking for rapid growth rather than profit.
Fourth, members of an MB cannot be in an employment relationship with the small partnership itself (Article 7(4) of the Law). This means that an employment contract cannot be concluded between a member and the legal person itself. Employment contracts can only be concluded with employees who work for the small partnership, but who are not members of the MB. Therefore, it may be difficult to motivate employees by offering MB membership in the future (UAB equivalent – motivating employees by offering shares in the UAB).
Fifth, the MB is designed for people who want to create a small family business that does not require large investments. As well as for those who know each other well and want to participate in the management and activities of the MB.
Sixth, the disadvantage of an MB is that if you choose this type of legal form, it is not really possible to attract investors because an MB does not have shares, so the rights of the owners are equal. Each MB member has one vote in the MB membership meeting. And that is completely unacceptable for investors in start-ups. In order to attract additional funds, an UAB can issue new shares that shareholders pay a fixed amount of money to acquire; an MB does not have this option.
Seventh is that even though an MB is not required to have a minimum authorised capital, MB members pay contributions (the size and payment of which is established at the membership meeting), and the MB’s profit is distributed in proportion to the size of the member’s contribution (the articles of association may provide for a different distribution of profits).
Eighth, as a legal form, the MB is not well known and understandable for the foreign investor because there are no known analogues in the world, and this becomes an obstacle/source of misgiving for foreign investors to invest in an MB.
Ninth is that since the MB does not have a clear procedure for voting and distributing profits, it may be more difficult to settle disputes between MB members.
Tenth, in terms of bookkeeping, an MB is only simpler than a UAB when the MB does not have any employees or is not a VAT payer.