Reserve fund

What it means

The reserve fund is part of equity built from profit under the law or the articles. It exists to absorb losses, not to be paid out to members.

In an s. r. o. it is created no later than the first profitable year and topped up with a percentage of net profit until it reaches a set share of registered capital.

The reserve fund must not be confused with a provision: a provision is a liability of uncertain amount or timing, such as for untaken holiday, and is created as a charge to costs. The reserve fund comes only out of finished after-tax profit and does not reduce costs; a provision sits in liabilities, the fund in equity.

How it works in practice

The general meeting decides on it when approving the distribution of profit. Forget the fund and the distribution breaches the law, with the payout potentially repayable.

The fund is an accounting category, not money set aside. The company need not hold the matching amount in the bank, although doing so is sensible for liquidity planning.

When preparing papers for the general meeting we calculate the mandatory transfer from net profit and check whether the fund has already reached the statutory or contractual ceiling. If it has, no further transfer is needed and distributable profit can go elsewhere; if not, we put the transfer straight into the draft resolution so the members do not overlook it.

What to watch out for

Using it to cover a loss is its only purpose. Trying to pay it to members or release it into profit at the close is a breach and an auditor will say so.

The fund’s ceiling depends on the registered capital, so after a capital increase it moves up too. Companies whose fund was filled long ago forget this and distribute all profit for years, although under the new capital they should still have been topping it up; the correction then reaches into several closed years.