Is the limited liability company's equity problematic? A member loan as a possible solution

May is the time of preparing the balance sheet and adopting the report. At this time, it often becomes clear that the company's equity has become dangerously low - it may have fallen to half of the share capital or less due to losses. This situation requires immediate action, otherwise the company faces the risk of compulsory measures under the law.

If the company has outstanding member loan debt, in a lucky case, contributing it in kind may also be a solution.

Most business owners consider simply forgiving the member loan, but this is often not the most optimal way. Using the receivable from the member loan as a contribution in kind (non-monetary asset contribution) can be much more beneficial in some cases.

What happens during the operation?

Capital increase: The member makes his loan claim available to the company as a contribution in kind, which results in a capital increase.

Increase in share capital: Part of the claim increases the share capital.

Formation of a dividend: The amount above the nominal value is placed in a capital reserve, which can be a means of avoiding the recurrence of the problem.

Debt settlement: The member loan debt is hereby eliminated, the company's liabilities are reduced, and its capital position is stabilized.

What should you pay attention to?

Although the solution seems obvious, the process is complex:

Corporate law requirements: The capital increase process must be conducted in accordance with the articles of association and the applicable Civil Code.

Accounting rules: The value of the contribution and its accounting consequences must be accurately documented

Tax considerations: Transferring a claim as a contribution in kind may raise numerous tax issues, which should be discussed with an accountant or legal advisor in advance.

Don't leave it to the last minute!

Using a member loan as a capital increase is a tricky tool to restore a company's equity. However, if the documentation or legal basis is faulty, a company court proceeding or a later tax audit can cause serious problems.

Is your company struggling with equity problems and has member loan debt?

Instead of taking unprofessional steps, choose the safe, legally and accountingly organized path. Click here for a legal consultation, and we will help you plan and implement the capital raising process in its entirety.