Capital increase

What it means

A capital increase puts further funds into the company and is entered in the commercial register. It can be cash, a non-cash contribution or setting off a member’s claim.

Unlike a shareholder loan the money is not repaid. It improves the ratio of own to borrowed funds, which banks and trading partners both watch.

A capital increase need not mean new money. A company can also increase capital from its own resources, such as retained earnings or other funds, where value merely moves within equity. Total equity stays the same; it is simply locked in so that it can no longer be paid out freely to the members.

How it works in practice

The process is formal: a general meeting resolution, usually a notarial deed, the capital administrator’s declaration and the register entry. It takes effect only on entry.

A contribution to the capital fund is the alternative without touching the register. It is quicker, but must be provided for in the articles and has its own rules for later distribution.

When a new member contributes, we also work out the price of entry. If the company is worth more than its registered capital, the newcomer often pays more than the contribution itself: part goes to registered capital and the rest to the capital fund. That keeps the ratio between the amount paid and the ownership interest received as the members agreed.

What to watch out for

In a company crisis strengthening equity is usually the only way out: shareholder loans may not be repaid and a bank will not lend. Deal with it before the crisis arrives.

If the increase is never entered in the register, the resolution lapses and the company must return the contributions. Anyone who meanwhile spent them on day-to-day running, assuming registration was a formality, hits trouble exactly when the company most needs the money. It is worth completing the entry before the funds go into the cash flow plan.