Increasing capital stock through company reserves
An increase in capital is a method of company financing that consists of increasing its own company funds by increasing its capital stock.
There are two ways to increase the capital stock of a company:
- By creating new shares or issuing new shares
- By increasing the nominal value of existing shares.
In both cases, the capital may be increased by means of new cash or non-cash contributions to the share capital, including the provisions of credits against the company, or with charges to profits or reserves already incorporated into the last approved balance sheet.
Increasing capital stock through reserves or profits
This consists of using available reserves such as the share premium, the legal reserve and the undistributed earnings allocated to reserves. It requires the completion of an accounting entry of the transfer from the reserve or profits account to the capital stock.
To increase capital stock through the reserves, which should be freely available, it must comply with the limits established by law:
- The Shareholder’s Meeting shall decide on the implementation of the results for the year in accordance with the approved balance sheet
- After the reserves stipulated by Law or in the Bylaws have been covered, dividends may only be distributed with a charge to income for the year or to unrestricted reserves, if the value of the net worth is now lower than the capital stock
- If there are losses from previous years that lower the value of the Company’s net worth to below the capital stock figure, the income shall be used to offset those losses.
Balance and Audit
The Law on Capital Companies establishes that the General Meeting should approve the process of increasing capital should be approved balance by referring to a date within six months immediately prior to the agreement of the capital increase.
This article is not considered as legal advice