When to switch from individual activity to a company? 5 signs

You should switch from individual activity to a company when its main advantages — simplicity and low cost — stop outweighing the growing risk and tax burden. The five clearest signs are: your revenue and profit keep growing; you want to separate personal assets from the business (limited liability); you start hiring a team; clients or investors require a legal entity; and from July 2026 the Sodra base for individual activity jumps from 50% to 90% of taxable income. If you recognise two or three of these, it is probably time to seriously consider a small partnership (MB) or a private limited company (UAB).

In this article we go through each sign one by one, show an example of how the Sodra (state social insurance) base changes, and discuss when an MB makes sense and when a UAB does. All figures here are indicative (2026), so before you decide, check them on the VMI (State Tax Inspectorate) and Sodra websites, and the full setup process is laid out in our guide on how to start a business in Lithuania 2026.

Individual activity is great to start with, but there comes a point where you overpay for its simplicity in risk and taxes — that is when a company becomes cheaper.

In short: when to switch from individual activity to a company?

It is worth reconsidering your form not when you hit some single "magic" number, but when several signals pile up at once. The five signs in brief:

• Turnover and profit are growing — as profit rises, the effective tax on individual activity climbs, while a company form becomes more flexible.
• You need limited liability — you do not want to answer for business debts with your personal assets.
• You are hiring people — a legal entity is a cleaner, clearer structure for a team.
• Partners want a legal entity — large clients, public tenders or investors often will not work with a natural person.
• The Sodra burden is rising — from July 2026 the individual-activity Sodra base grows from 50% to 90%.

If you are just starting and still choosing a form from scratch, our detailed comparison of individual activity, the business certificate and an MB sets out the costs and limits of all three side by side.

Sign 1: revenue and profit keep growing

While individual-activity profit is modest, the tax stays attractive: up to EUR 20,000 of annual profit, the effective rate of personal income tax (GPM) is around 5%. Between EUR 20,000 and EUR 42,500 of profit the effective GPM rises gradually from 5% to 20%, and above EUR 42,500 a progressive 20% / 25% rate applies. In other words, the more you earn, the less of the individual-activity tax advantage remains. Remember that expenses can be deducted either at the 30% flat rate or based on actual documents — as costs grow, the second method is often more favourable.

For comparison, a company taxes profit with corporate income tax (CIT): the standard rate in 2026 is 17%, for small companies it is 7%, and newly established small companies may even pay 0% for the first one to two years (if they have fewer than 10 employees, income under EUR 300,000, and are not part of a group). Taking profit out as dividends adds a further 15% GPM. Exactly where the benefit tips over depends on your profit and share of costs, so there is no single universal "break-even point" — it is worth running both options with your real numbers.

Watch value added tax (VAT) too: once you reach EUR 45,000 of turnover over the last 12 months, you must register as a VAT payer regardless of your business form. As revenue grows you will hit this threshold either way, so it pays to plan your bookkeeping in advance.

Sign 2: you want to separate personal assets (limited liability)

The biggest drawback of individual activity is unlimited liability. For business debts or damages you answer with all your personal assets, including savings or your home. While risk is low this is no problem, but as orders, stock and supplier commitments grow, a single failure can cost your personal property.

Both an MB and a UAB provide limited liability — you answer for the company's obligations only up to your contribution, not with personal assets. A UAB's minimum share capital is EUR 1,000 (at least 25%, i.e. EUR 250, must be paid in before registration, the rest within 12 months). An MB has no share capital requirement at all, which is why it often becomes the first step out of individual activity.

Sign 3: you start hiring a team

Individual activity is built for one-person work. When you need to employ people, it is more convenient and transparent to do so through a legal entity: clearer responsibility and easier handling of employment contracts and payroll. Hiring a team adds the employee's GPM, Sodra contributions (VSD and PSD) and the employer contribution — together these make up the real cost of the workplace, which you must build into your budget.

How a "paper" (gross) salary turns into a take-home amount and what an employee really costs is explained in our article on salary taxes in 2026 — GPM, Sodra and NPD. You can calculate a specific scenario quickly with the salary calculator, which instantly shows net pay, taxes and the cost of the workplace.

Sign 4: clients or investors require a legal entity

Larger clients, public-sector procurement and investors often work only with legal entities — they need a clear structure, the ability to sign more serious contracts and to acquire a stake in the company. With a natural person running individual activity, those options frequently simply do not exist.

The difference between forms matters here: an MB may have only natural persons as members, no more than 10 of them. A UAB may have both natural and legal persons as shareholders, up to 249, and you can also sell a share of the stock. If you plan to bring in an investor or partner, the UAB structure is usually more flexible.

Sign 5: the individual-activity Sodra base rises from 50% to 90%

Perhaps the most important 2026 change: from July 2026 the individual-activity Sodra contribution base is increased from 50% to 90% of taxable income. This means social insurance contributions are calculated on an almost doubled amount, so for many people running individual activity the actual Sodra burden will rise significantly. Do not forget the compulsory health insurance (PSD) minimum either — about EUR 80.48 per month, which must be paid even when income is low.

How much you actually pay depends on your income and the applicable rates, so check the exact amount in our guide on how much Sodra to pay in 2026 and on the official Sodra website. It is precisely this jump in the base that becomes, for many, the decisive argument to reconsider their business form.

Example: how the Sodra base changes

Suppose individual-activity taxable income for the year is EUR 20,000. Under the rules in force until July 2026, the Sodra contribution base would be 50%, i.e. EUR 10,000. From July 2026 the same activity would calculate contributions on 90%, i.e. on EUR 18,000 — the base grows by 80%. Because contributions are calculated on this base, they rise proportionally, even if the rates themselves do not change.

At the same time, remember that at this level of profit the individual-activity effective GPM rate is around 5%. So the total burden consists of a relatively small GPM and a considerably larger Sodra share. Whether it is then worth moving to an MB or UAB depends on your costs and how much profit you take out, so it is worth calculating both scenarios with your real numbers.

MB or UAB: which company form to choose?

Choosing between the two most popular forms:

• MB (small partnership) — no share capital required, members may only be natural persons (up to 10), simpler management. Suitable when one or a few natural persons move over from individual activity. What taxes an MB pays is covered in detail in our article on what taxes an MB pays in 2026.
• UAB (private limited company) — requires EUR 1,000 of share capital, shareholders may be natural and legal persons (up to 249). Suitable when you plan investors, partners or a more serious structure.

A broader comparison of the forms by liability, taxes and management is in our article on MB or UAB: which to choose in 2026.

On setup costs: electronic registration at the Registrų centras (Centre of Registers) costs about EUR 30, the name reservation (JAR-5) about EUR 16 (valid up to 6 months), and if a notary is needed, roughly EUR 85–338 depending on capital. Registration at the Registrų centras takes about 3 working days (in practice often 5–10). Once the company is set up, obligations appear too: the annual financial report is filed with the Registrų centras by June 30, and the CIT return with the VMI by June 15. It is also worth accounting for the temporary additional defence levy, whose rate you should confirm with the VMI.

Check it: the calculator and official sources

Before changing your business form, calculate both scenarios with your own numbers. The fastest way to estimate employee or your own salary costs is the salary calculator, which turns gross into net and instantly shows GPM, Sodra contributions and the cost of the workplace.

Always verify current rates and thresholds in the primary sources:

• VMI — GPM, VAT and CIT rates and filing deadlines;
• Sodra — VSD, PSD and the individual-activity base changes;
• Registrų centras — company setup, capital and annual reports.

Disclaimer: all figures in this article are indicative (2026) and provided for general information only — this is not tax or legal advice. Tax rates and thresholds change, so before making decisions check the latest amounts on the VMI, Sodra or Registrų centras websites, or consult an accountant or lawyer.

Wondering whether it is time to switch from individual activity to an MB or UAB? Start with the numbers: use the salary calculator to estimate your team's and your own payroll costs, and for a scenario tailored to your case book a consultation — we will help you weigh the risk, taxes and the most suitable form for your business.