Recent trends in the company law of the Baltic States – reducing the minimum authorised share capital requirement
This overview aims to briefly introduce recent trends in the company law of the Baltic States on reducing the minimum authorised share capital requirement for limited liability companies. The following describes and compares Latvian, Estonian and Lithuanian approach for achieving this goal.
Reducing the minimum share capital requirements for limited liability companies in the Baltics is the consequence of trends in Western Europe, as many Western European countries had reduced the minimum capital requirements during the last decade.
Latvia was the first of the Baltic States which decided to reduce a minimum share capital required to incorporate a limited liability company. On the 1st of May 2010 relevant amendments to the Latvian Commercial Code were enacted. The amendments provide for an opportunity to set up a SIA (limited liability company) with a minimum share capital of 1 lat. The shareholders of this “small capital” SIA shall be liable for the company’s obligations to any third parties with their personal property up to the amount of their contribution, i. e. 1 lat only, with the exception in the case of the company’s insolvency. These amendments were a novelty in the Latvian company law. Latvian Commercial Code was supplemented with new article 185¹, which provides that the minimum share capital of a limited liability entity may be 1 to 1,999 lats, but at the same time restrictions for the establishment of a new limited liability company with a smaller share capital were enacted, i. e.:
- only natural persons may set up a limited liability company and the maximum number of its shareholders is five;
- the company’s board must be composed of one or more of its shareholders;
- a person may be a shareholder of only one company which has the share capital of less than 2,000 lats.
Should the company cease to meet any of the requirements above, it’s share capital must be increased to reach 2,000 lats within three months after the failure to meet any of the above requirements.
It is important to note that in order to ensure a minimum level of creditors’ claims would be satisfied, Latvian Commercial Code provides for an obligation for a newly set up “small capital” SIA to accumulate reserves. It means that at the end of each financial year the company must defer at least 25 % of its annual profits and hereby form a reserve until it reaches 2,000 lats. The use of the reserve is strictly limited by the Commercial Code, i.e. it may be used to increase the share capital or to cover company’s losses. Another important aspect is that in case of the company’s insolvency the shareholders are jointly liable for the outstanding part of the share capital in respect to the creditors.
It should be noted that under the Latvian Commercial Code the limited liability companies which were incorporated with a share capital of 2,000 lats or more are not allowed to reduce the share capital below 2,000 lats.
Estonian company law also provides a possibility to set up a limited liability entity, though the minimum share capital reduction trends in Estonia are rather overlooked. Minimum share capital for limited liability entity in Estonia is 2500 EUR now.
However, Estonian company law provides since 1st of January 2011 a possibility to set up a limited liability entity and delay a payment of the share capital (at least 2500 EUR). In order to use this possibility though certain conditions must be satisfied:
- only natural persons may become founders and shareholders (participants);
- participants are personally liable for obligations of the limited liability entity as long as the required share capital is not paid. Participant’s personal liability is limited to the amount a respective founder is obliged to pay as a share capital. Personal liability is applicable only in case the limited liability entity does not have enough assets to fulfill third party’s claims.
- it is prohibited to pay out dividends as long as the required share capital is not paid in;
- maximum share capital for a newly set up company with the delayed payment of the share capital is 250 000 EUR.
The regulation does not provide any obligatory period in which the founders shall pay the share capital. However, founders are free to decide to set up the period in which the share capital shall be paid in the memorandum of association.
It should be noted that OÜ with delayed share capital payment is not a new legal form of the company. However, the possibility to set up a limited liability entity with minimum costs in Estonia currently exists through a possibility of a delayed payment of the share capital, as discussed above.
First initiative to reduce the minimum share capital requirements for Lithuanian limited liability companies was expressed in 2009 by the Ministry of Economy of the Republic of Lithuania. Unfortunately it was later rejected by the Lithuanian Seimas (Parliament) at that time.
Nevertheless Lithuanian Parliament adopted the Law on Small Communities with aim to improve the business environment and encourage young entrepreneurs to start business with minimum expenses on 29th of June 2012. The new law shall come into effect as of 1st of September 2012. The law establishes a new legal entity form – a small community. According to the law, the small community shall be considered as limited liability private company without any minimum share capital requirement.
Although the small communities are not required to have a share capital, its members may agree to form it of any size. In such a case the share capital may be formed by contributions of its members.
It is alleged that a small community will fill the niche between the individual company and the limited liability company. It will enable to organise and execute the business along a principle of personal trust-based cooperation (intuitu personae): the law stipulates that a decision on accession of a new member in a small community must be taken by all existing members unanimously. However, this provision is not mandatory, which means, that the law provides a right to establish different new members’ admission rules in the regulations of a small community.
Another positive feature of the small community is a simplified managing structure. A small community may have only one governing body – the members’ meeting. In such a case the members’ meeting should be considered as its governing body which makes decisions on all issues of the day-to-day management. However, members do have a right to appoint a sole managing body of the small community and duties of a manager may be assigned to any of the members of the small community. Please note that labour contract is not to be concluded between the small community and the manager and a civil (services) contract shall be concluded instead. This should ensure the flexibility of the relations between the small community and the manager.
There is another positive aspect in managing a small community, as it is not required to have an accountant and its duties may be assigned to any member of a small community. This also helps to keep business start expenses of down.
However, there are also several restrictions for the establishment of a small community provided in the Lithuanian law, i.e.:
- a small community may be established by natural persons only; and
- a number of its members cannot exceed ten (10).