Management Services Agreement Between a Small Partnership (MB) and Its Manager: What You Need to Know

A Small Partnership (MB) remains one of the most popular business structures in Lithuania, especially among entrepreneurs and small business owners. One of the reasons for its popularity is the flexibility it offers in management, taxation, and profit distribution.

However, one question often arises after establishing an MB: how should the relationship between the company and its manager be formalized?

Unlike a private limited company (UAB), where the director is typically employed under an employment contract, an MB manager is commonly engaged through a management services agreement. This arrangement defines the manager's duties, responsibilities, compensation, and authority without creating a traditional employer-employee relationship.

In this article, we will explain how a management services agreement works, when it is required, how taxation is handled, and what business owners should pay attention to before signing such an agreement.

What Is a Management Services Agreement?

A management services agreement is a contractual arrangement under which an individual provides management or administrative services to a Small Partnership.

It is important to understand that this type of agreement is not considered employment. Instead of being regulated by labor law, it falls under the provisions of the Civil Code.

As a result, the manager is not treated as an employee in the traditional sense. Standard employment protections such as paid annual leave, minimum wage requirements, and working time regulations generally do not apply.

An MB manager may be either a member of the Small Partnership or an external individual. In practice, when one of the members takes on the role of manager, a management services agreement is usually the preferred and most widely used solution.

When Is a Management Services Agreement Necessary?

Whenever a Small Partnership appoints a manager, the relationship between the company and that manager should be properly documented.

In most cases, this is done through a management services agreement.

Some MBs choose not to appoint a manager at all. In such situations, the members themselves handle management responsibilities or delegate decision-making to the members' meeting. However, once the business begins operating actively, serving customers, signing contracts, and managing daily operations, appointing a formal manager often becomes a practical necessity.

The agreement should clearly define the manager's role. Typical responsibilities include organizing business activities, signing company documents, representing the business before government institutions, overseeing financial matters, and ensuring smooth day-to-day operations.

How Is a Manager Taxed Under a Management Services Agreement?

Taxation is one of the most frequently discussed aspects of this arrangement.

When the manager is also a member of the Small Partnership, compensation received under the management services agreement is generally treated as personal income. The individual is responsible for declaring and paying personal income tax in their country of tax residence.

Flexibility of a management services agreement is often one of its biggest advantages. However, business owners should avoid creating arrangements that closely resemble traditional employment, as tax authorities may review such situations more carefully.

What Are the Advantages?

For many small businesses, a management services agreement offers significant benefits.

One of the biggest advantages is flexibility. The company and manager can agree on compensation terms that suit the business's financial situation and operational needs.

Administrative requirements are also generally simpler than those associated with employment contracts. There is no need to manage employee schedules, employment records, or many of the formal obligations that come with labor law.

Furthermore, management fees paid under the agreement are typically recognized as business expenses, which can be beneficial from an accounting perspective.

Potential Risks to Consider

Although the model offers flexibility, it is not without risks.

Problems can arise when the manager performs duties in a manner that closely resembles an employee's role. For example, if there is a fixed working schedule, direct supervision, mandatory attendance, and other characteristics typically associated with employment, authorities may question whether the relationship has been structured correctly.

For this reason, the agreement should accurately reflect the actual nature of the services being provided.

Common Mistakes Made by MB Managers

One of the most common mistakes is operating without any formal agreement at all. While some businesses overlook this requirement, doing so may create legal and tax-related complications in the future.

Another issue involves incorrect tax reporting. Since managers are often responsible for declaring their own income, missing deadlines or making reporting errors can lead to penalties and additional obligations.

Some business owners also attempt aggressive tax optimization strategies by withdrawing most or all company income as management fees. If the compensation appears unreasonable compared to market conditions, it may attract unwanted attention from tax authorities.

Finally, many entrepreneurs mistakenly treat a management services agreement as an employment contract. Mixing these two concepts can create unnecessary legal and financial risks.

What Should Be Included in the Agreement?

Although a management services agreement is generally simpler than an employment contract, its content remains extremely important.

The agreement should clearly describe the manager's duties, authority, responsibilities, and compensation arrangements.

It is also advisable to include provisions covering confidentiality, conflicts of interest, liability, and termination procedures.

A well-drafted agreement helps reduce the risk of misunderstandings, disputes, and compliance issues in the future.

Conclusion

A management services agreement is one of the most commonly used ways to formalize the relationship between a Lithuanian Small Partnership and its manager. It provides flexibility, simplifies administration, and allows business owners to structure management compensation efficiently.

However, the agreement should always be prepared carefully and reflect the real nature of the relationship between the parties. Improperly structured arrangements or incorrect tax treatment can lead to avoidable problems later on.

Before signing a management services agreement, it is always recommended to seek advice from a qualified accountant or legal professional to ensure the chosen structure is fully compliant and suitable for your business.