Share Capital, Supplementary Capital and Reserve Capital in a Limited Liability Company

In this article we discuss the following issues concerning the types of funds (share capital, supplementary capital and reserve capital) created in a limited liability company (sp. z o.o.):

1. Types of funds created in a limited liability company (mandatory and optional),
2. How capital is paid into a fund,
3. The purpose of creating a fund,
4. How money from a fund may be spent.

Share Capital

A company's share capital is a mandatory fund created when the company is formed. It consists of the contributions made by the shareholders and equals the nominal value of all shares created and taken up by the shareholders. The amount of the share capital is set by the articles of association (the share capital may be increased or reduced during the company's existence).

The minimum share capital is PLN 5,000, and the nominal value of a share may not be lower than PLN 50 (Article 154 §§ 1 and 2 of the Commercial Companies Code (CCC)).

Example: a company with a share capital of PLN 5,000.00 may have, for example, 50 shares with a nominal value of PLN 100 or 100 shares with a nominal value of PLN 50, but it may not have 200 shares with a nominal value of PLN 25.

Contributions to cover the share capital may be made in cash or in non-cash form (for example, real estate, copyright, know-how, an enterprise, an organised part of an enterprise (ZCP) or other assets that can be valued). In the case of a non-cash contribution, the articles of association should specify in detail the subject of the contribution and the shareholder making the contribution in kind, as well as the number and nominal value of the shares taken up in exchange (Article 158 § 1 CCC).

Each shareholder makes their own cash contribution. On the day the articles of association are signed, the shareholders pay in the funds to cover the share capital by:

1. payment into the company's bank account (if the company in organisation already has an account),
2. payment of cash into the company's cash desk (the company issues receipts: KP cash receipt vouchers, kasa przyjęła).

If the payment was made in cash into the company's cash desk and the company then opened a bank account (for example, after entry in the National Court Register (KRS) and obtaining a tax identification number (NIP)), or decided to transfer these funds to an existing bank account, the management board may pay the share capital into the company's bank account. The payment is a purely factual and technical act, unrelated to the representation of the company, so it may be made by any management board member under their right to manage the company's affairs (Article 204 § 1 CCC).

The subject of the contribution to the company's share capital remains at the exclusive disposal of the company's management board (Article 158 § 3 CCC).

The share capital mainly serves an organisational function (it allows the shareholders to participate in the company; the share capital is divided into shares; the shares are divided among the shareholders; holding shares gives the shareholders specified rights and obligations) and a guarantee function (it protects potential creditors; the shareholders may not pay themselves remuneration out of funds paid in to cover the share capital; dividends are paid out of profit earned; Article 192 CCC).

The share capital may be used for the company's expenses related to its business activity (for example, office rent, the purchase of equipment, official fees). However, funds paid in to cover the share capital when the company is formed may not be used to pay remuneration, and such remuneration may not be credited towards a shareholder's contribution (Article 158 § 2 CCC).

Supplementary Capital

The creation of supplementary capital in a limited liability company is, as a rule, optional. The obligation to create supplementary capital arises only where shares have been taken up at a price higher than their nominal value, that is, where there is a surplus of the value of the contributions made by the shareholders over the nominal value of the shares taken up, known as agio (for example, a shareholder takes up newly created shares with a nominal value of PLN 100 for a price of PLN 200, so the surplus is PLN 100 for each share taken up) (Article 154 § 3 CCC).

The Commercial Companies Code contains no provisions on the rules for creating supplementary capital in a limited liability company. The articles of association may regulate this matter. In practice, supplementary capital is also created where the company earns a profit in a given year and the shareholders decide by resolution to allocate it to the share capital.

Share capital is created to give the company financial liquidity and to cover possible losses. Dividends may also be paid to the shareholders out of the supplementary capital under Article 192 CCC, and the company's share capital may be increased out of it under Article 260 CCC. The supplementary capital may be used to pay dividends only to the extent that it was created from profit. Agio may not be paid out as a dividend. It may, however, be used to increase the share capital from company funds and to transfer newly created shares to the shareholders (instead of a dividend, the shareholders receive new shares).

Reserve Capital

Reserve capital is created if the articles of association contain a provision to that effect. In most cases it is used to cover losses or particular expenses. Its purpose is to secure the company's financing of planned undertakings or unexpected losses. Some companies also create reserve capital for future dividend payments.

As with supplementary capital, the detailed rules for creating and operating reserve capital are not regulated by the Commercial Companies Code. The articles of association may, however, regulate this matter.

The articles of association may also provide for the creation of reserve capital (funds) that may not be distributed even though they are created from profit (for example, an investment fund that may be used only to finance the company's investments).

Under Article 36(2e) of the Accounting Act, where the shareholders of a limited liability company adopt a resolution specifying the date and amount of additional payments (dopłaty), the equivalent of the additional payments is recognised as a separate item on the equity and liabilities side of the balance sheet (reserve capital from shareholders' additional payments).

A limited liability company may therefore create reserve capital for strictly defined purposes, derived from additional payments (a mandatory loan granted to the company by a shareholder). The rules for making additional payments are set out in the articles of association (and in Articles 177-179 CCC).

Funds may be paid into the reserve capital from shareholders' additional payments and also from net profit. The reserve capital may be used to increase the share capital. Funds in the reserve capital may be used only for the purposes specified in the articles of association or in shareholders' resolutions. Finally, under Article 192 CCC, dividends may not be paid out of funds in the reserve capital which, under the articles of association, should be transferred to that capital from the profit for the last financial year.