In this case, the amount of $28,715.00 will be deducted from the 2019 result to increase the legal reserve, with which it will have an amount of $60,000.00, representing one fifth of the share capital of the Company. Before diving deeper, you should know that reservations as such are not always mandatory in the limited liability company. In order not to confuse, it is necessary to distinguish two main groups: Determination of the legal reserve on the basis of the net profit of 2019 Note, separate case, that in case of work in front of a company in activity, the partners are obliged to constitute a special reserve fund (of 10% of profits), which will be added to the previous one. The Companies Supervisory Authority recalled that in simplified joint-stock companies, shareholders are free to organize at will the rules to which the company must be subject, bearing in mind that in the articles of association it is possible to freely determine the organizational structure of the company and other rules governing its operation. Well, its main function is to compensate for any losses that the company may have, as well as to be a guarantee for creditors in case of debt. According to Article 452 of the Commercial Code, companies are required to set up a legal reserve consisting of 10% of the profit of each after-tax period up to a maximum of 50% of the subscribed capital, the purpose of which is to protect the company`s assets, so that it is intended to cover the losses of the following years in which it was used. if need be. This booking obligation is not limited to the S.L., so you can find legal reserves in all types of companies. Taking into account that the statutory reserve represents up to 20% of the share capital (in this case 6000 euros). Company X would have to pay 1500 euros of profit into the legal reserve, which would be enough to reach the specified minimum.
In this sense, the statutory reserve is constituted after the approval of the annual accounts by the meeting. The legal reserve is a type of regulation in some companies, which is used in commercial law as a legal guarantee for the activities and operations carried out by the company, in the event that it is not responsible for it or must compensate its creditors for defaults or other economic and financial liabilities. The concept of legal reserve refers to a type of mandate by which a commercial company reserves a certain amount of capital as collateral for its activity. As a general rule, this sum corresponds to twenty per cent of the value of the total share capital. They are gained from the benefits of exercises until they reach that twenty percent. The law on joint-stock companies, recently replaced by the new law on capital companies, stipulates that each joint-stock company must allocate as a mandatory legal reserve 10% of the annual profit up to a maximum of 20% of the subscribed share capital. In practice, they are very important, as many companies have been forced to use their legal reserve, without which they would not have been able to survive. Since they do not constitute share capital as such, reserves are considered profits, which are included in the company`s own funds as passive capital, although they must have a counterpart in the assets.
This means that they are part of the financing of the company as such and therefore cannot be sold for distribution as dividends, except in certain special cases. The reserve system is legally structured in such a way that the company is obliged to strengthen the share capital, for which all shareholders are responsible, and the creditors of the shareholders. The resulting protection allows the company to carry out its activities without prejudice to third parties. This is why reserve funds can never be used to pay dividends to shareholders. For the financial statements to be presented correctly, it is necessary that the relevant accounting documents are drawn up to reflect the final amount of the legal reserve, as well as to transfer the balance of the profit and loss account for the year to the accumulated profit. This means that if a company earns 100, it will be able to use and spend 90, but the other 10 must be saved to build up a legal minimum reserve. In the end, I have left you with an example so that you understand the percentages. This type of reserve is a subset that belongs to a broader category of reserves from companies` retained earnings and also©includes special, statutory and voluntary reserves, to name a few.
The common feature of these categories is that they arise from the economic benefits of the company`s activity: that is, if this year`s result shows a positive balance. As I have already mentioned, the obligation to build up the legal reserve affects the benefits distributed within the limited liability company. The legal reserve is a fund for the protection of a company that helps it deal with contingencies that may arise; For example, to compensate for losses. Therefore, the legal and financial details of this important corporate obligation will be discussed below. In addition, the statutes may provide for the possibility of providing for a higher percentage than the voluntary reserves or, if the statutes do not reflect this, the general meeting may decide on the use of these benefits and the percentage to be allocated to the voluntary reserves and distributed among the members. Amount to be considered to increase the legal reserve Law 1258 of 2008 does not create an obligation to establish a legal reserve, unless this is stipulated in the statutes, which does not prevent the Assembly, by fulfilling the relevant conditions, from reforming the legal provision in order to abolish it, as its character is optional. From a legal point of view, reserves represent a set of securities and assets that are excluded from distribution and dividends that receive shares to support economic activity. Therefore, these are sums of profit and are intended to increase net wealth. It is important to note that if the statutory reserve is distributed for purposes other than its capitalization, the manager may repeat against shareholders the value of what is remitted to them, and as can be seen, the accumulated legal reserve of $31,285.00, a figure that still does not exceed the amount of $60,000.00, This corresponds to one fifth of the share capital (20%). This leaves $28,715.00 to be separated from profit. One of the doubts you may have expressed is what the purpose of all legal obligations is. In this case, since the amount of $28,715.00 is required to complete the legal reserve of 20% of the share capital.
According to the law, these correspond to twenty percent of the total available share capital. Therefore, the reserve fund must be replenished again and again to reach this share: if this value is not reached, ten percent of each year`s profits are used for this purpose. Since these are reserves intended to cover losses©and defaults, these reserves cannot be manipulated by the Company for any other purpose, and its partners cannot dispose of them for any reason. According to economists, reserves serve future employment and are evidence of economic stability and security. We have company X, which made a net profit of 75,000 euros last year and has a share capital of 30,000 euros. The existing legal reserve is 4500 so far, how much of the benefits obtained should be used for this? And what happens to the reserve if the company closes at a loss? Well, first of all, voluntary or legal reservations of existing reserves apply. In the absence of the latter, legal reserves would be used to balance them, as we have already seen. can be capitalized: in this case, it must be reconstituted from the following year in which it is activated Third parties can request its constitution: in addition to shareholders, the company`s creditors can also summarily request the integration of the legal reserve. In this context, L.C. Antonio Castillo Sánchez, tax advisor at IDC Asesor Fiscal, Legal and Labor, describes the procedure for creating the legal reserve on profits 2019, the case of a public company with variable capital created in 2016, as shown below: The legal reserve is a type of passive capital that serves as collateral for the activity of a company and represents a percentage of the total share capital. Although its value is deducted from profits not received by the partners, it does not increase the overall value of the business; The shareholder becomes a creditor of the reserves, because they are part of the value of the company`s equity.
This is because reserves can be used in future negative years to cover losses©or compensate for a decline in business performance. The allocation of reserves may result from such circumstances and their replenishment is subject to a profit warning.