Share capital

What it means

Share capital is the sum of the members’ contributions to the company. For an s. r. o. the Commercial Code sets both a minimum total and a minimum contribution per member; both are entered in the commercial register.

It forms part of equity, and therefore of liabilities and equity - it is not money in the bank. After registration the contribution is used in the business and turns into stock, equipment or running costs.

Registered capital, a contribution and an ownership interest are not the same thing. A contribution is what one shareholder puts in, registered capital is the sum of all contributions, and the ownership interest expresses the shareholder’s rights and duties. Its size follows the ratio of the contribution to registered capital unless the articles say otherwise.

How it works in practice

Contributions may be in cash or in kind; a contribution in kind is valued by an expert report. Increasing or reducing share capital is a resolution of the general meeting and is entered in the register.

An increase is also used to restore a company - for instance by capitalising a member’s loan, which then ceases to be a liability and lifts equity instead.

Before the registration petition is filed, the statutory part of the contributions has to be paid up, and the contribution administrator confirms it in a declaration. When opening the books of a new s. r. o. we therefore book the full registered capital and show the unpaid part as a receivable from shareholders until they pay it in.

What to watch out for

Large share capital is no guarantee of solvency: what counts is total equity including retained profit and accumulated losses. And reducing capital triggers creditor protection rules that add months to the process.

After the company is registered a shareholder quietly takes the contribution back, as a loan to himself or as an expense without a document. The law does not allow a contribution to be returned while the company exists, the money has to come back, and if creditors suffer, the director’s liability for allowing it comes into play.