How to determine your share capital?
When choosing to conduct business as a company, it's mandatory to establish share capital. There are several criteria that can help determine your starting share capital.
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When choosing to conduct business as a company, it's mandatory to establish share capital. While the law no longer imposes a minimum amount (with some exceptions), how do you determine the amount of initial share capital? There are several criteria that can help determine your starting share capital.
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Table of Contents
- Composition of Share Capital
- Minimum Share Capital Requirements
- Covering Business Expenses
- Credibility with Partners
- Financing Needs
- Share Capital and Tax Reduction
- Undercapitalization
1. Composition of Share Capital
Share capital equals the total contributions (cash or in-kind) made by the shareholders at the time of company creation.
Once the share capital is established, it is not permanently fixed. It can be increased or decreased during the life of the company based on its needs.
2. Minimum Share Capital Requirements
For most structures today, the law does not impose a minimum share capital. For EURL, SARL, SASU, SAS, and SC, the amount of share capital is freely determined by the statutes.
However, for SA and SCA, the minimum share capital must be €37,000.
There are also specific requirements for cooperative companies (Scop and Scic):
- A Scop is a cooperative company in the form of an SARL, SAS, or SA. When in the form of an SARL or SAS, the minimum share capital is €30; when in the form of an SA, it is €18,500.
- A Scic (collective interest cooperative company) can also be an SARL, SAS, or SA. When in the form of an SARL or SAS, there is no minimum share capital; when in the form of an SA, it must be at least €18,500.
3. Covering Business Expenses
The amount of share capital should be sufficient to meet the initial financial needs.
Thus, one of the criteria for determining the amount of share capital is to assess how much is needed to cover initial expenses without compromising the development of the company.
Contrary to popular belief, share capital is not locked in the company's bank account but can be used for initial investments once the company is registered (Kbis obtained).
To estimate initial needs, you can create an initial financing plan. This plan ensures you have the necessary capital to finance the required expenses to start your business.
4. Credibility with Partners
Share capital is generally a guarantee for creditors, and too low a share capital can be problematic for certain projects (e.g., public contracts) and when working with other businesses.
The amount founders are willing to contribute to their project in share capital reflects the risk they are willing to take.
With too low a share capital, you may face a credibility issue with partners, suppliers, etc., as they might think the shareholders don't believe in their project or consider it risky.
5. Financing Needs
When seeking financing, the lender may require that a portion of the financing need be personally contributed by the shareholders.
Typically, a contribution equivalent to 30% of the total loan amount is required. Too low a share capital can reduce the chances of obtaining a bank loan or require more substantial personal guarantees, such as a personal guarantee.
6. Share Capital and Tax Reduction
Share capital can also be determined based on the personal tax situation of the shareholders. There is a mechanism allowing shareholders to benefit from an income tax reduction when they make cash contributions to a company's capital. However, the company must meet several criteria to be eligible for this mechanism.
The larger the contribution made by the shareholder, the greater the income tax reduction. Therefore, the amount of share capital can be a tool for tax reduction.
7. Undercapitalization
Setting a reasonable share capital helps avoid undercapitalization in the first fiscal year.
Losing half of the share capital means that the company's equity has fallen below half of its share capital.
Equity is the company's resources and includes share capital, reserves (profits from previous years left in the company), and the current year's result (profit or loss).
If the company finds itself in such a situation, the law requires taking actions to improve the financial situation. The manager must then convene a general meeting of shareholders to present the situation and propose the following solutions:
- Dissolve the company immediately (very rare),
- Maintain its activity while waiting to restore equity to at least half of the share capital within two years.
Determining the initial share capital is a crucial step in the process of creating a company. By carefully assessing business needs, financing requirements, and partner expectations, you can lay a solid foundation for the future development of your company. Hopefully, this article provides useful information to help you determine your company's initial share capital.
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Whether you're a freelancer, startup, or established enterprise, Micco offers the tools and support needed to streamline financial operations and drive business growth. Check out Micco today to discover how it can complement your business banking needs.
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