Reducing and increasing a company’s share capital

Share capital is not a fixed quantity – during the life of a company it can be adjusted both upwards and downwards. Whether you are considering setting up a company with higher capital or need to adjust the capital of an existing company, it is good to know the rules and the procedure. In this article, we explain when changing the share capital makes sense and how it is done.

Why change the share capital

There are usually several reasons. Increasing the capital can strengthen the company’s credibility, allow a new shareholder to join or provide additional capital for development. A reduction, on the other hand, is an option when the company does not need so much capital or is dealing with losses. When setting up a company, the amount of the capital is set at the outset, but it can later be adapted to the situation.

Ways of increasing the share capital

The capital can be increased through new contributions from the shareholders, by admitting a new shareholder or from the company’s own resources, for example from retained earnings. Each method has its own rules and accounting implications.

• New cash or non-cash contributions from existing shareholders.
• A new shareholder joining with their own contribution.
• An increase from retained earnings or other own resources.
• A combination of several methods.

Procedure for changing the share capital

A change in the share capital is decided by the general meeting and requires an entry in the Commercial Register (ORSR). In general, the procedure looks like this:

1. The general meeting approves the change in the capital and its terms.
2. The relevant documentation and any declarations are drawn up.
3. An application to enter the change in the Commercial Register is filed.
4. The change is reflected in the company’s accounts.

What to watch out for when reducing the capital

A reduction in the capital can affect creditors, which is why the law lays down protective rules, including information obligations. You must not fall below the statutory minimum. We recommend discussing the procedure in advance to avoid complications with the registration.

Accounting and tax aspects

Every change in the capital must be properly recorded in the accounts and may have tax consequences, particularly in the case of an increase from own resources or a payout to the shareholders. An incorrectly recorded change can cause a mismatch between the Commercial Register and the financial statements, which later complicates the company’s further steps. It is therefore important that the entry in the register and the accounts form one consistent whole. Check the current fees and deadlines associated with registration, as they may change.

Impact on the shareholders and their interests

Every change in the capital also affects the shareholders and the size of their ownership interests. When the capital is increased through a new contribution, the ratio of the individual shareholders’ participation may change, which affects decision-making as well as the share of profit. It is therefore important to be clear in advance about how new contributions will be reflected in the ownership structure and to set these rules sensibly.

• An increase may change the ratio of the shareholders’ interests.
• A new shareholder joining will affect decision-making.
• The change is reflected in the share of profit.
• It is advisable to anchor the rules in the memorandum of association.

When an accountant can help

A change in the capital combines the legal and the accounting side, so it pays to work with experts right from the moment of setting up the company. Bilvao’s accountants will prepare the supporting documents for you, record the change correctly in the accounts and alert you to your obligations towards the register and the tax office, so that you avoid penalties and unnecessary delays with the registration.

Related articles: Managing director of an s.r.o.: rights, duties and liability, Share capital of an s.r.o.: how much and how to pay it in, Is the managing director liable for the company’s debts?.

Frequently asked questions

Does the general meeting have to approve a change in the share capital?

Yes, both an increase and a reduction of the share capital are decided by the company’s general meeting. The relevant documentation is drawn up for the change, and an application for entry in the Commercial Register is then filed. Check the exact requirements in current legislation.

Can a reduction in the capital put the company’s creditors at risk?

That is precisely why the law lays down protective rules, including information obligations towards creditors and the prohibition on falling below the statutory minimum. It is advisable to discuss the procedure with an expert in advance so that it goes smoothly and in compliance with the regulations.