According to the Commercial Code (§ 176), the net assets of your private limited company should not fall below one-half of your company's share capital. If this criterion is not met, you have so-called "insufficient equity situation".
The value of your company’s net assets (total equity) is reviewed by the registrar at least once a year - it usually happens after the submission of your annual report to the register. If the value of the total equity in the annual report does not comply with the requirements established by the Commercial Code, the activities planned to resolve the insufficient equity situation shall be described in the management report (an appendix of the annual report). If the company fails to notify the registrar of its future plans regarding the equity, or the explanation is not considered sufficient, you may receive a warning letter reminding you about the situation and asking for additional explanations.
Here is an illustrative example of what constitutes the total equity and how its value is calculated. In the case below, the share capital of the company is 2500 euros. The company made 1000 euros net loss during its first financial year (Year 1) and the shareholder did not make the share capital contribution. The second year (Year 2) the share capital of 2500 euros was paid by the shareholder, and the company’s financial outcome was a 500 euros net profit:
|Equity (Year 1):||Equity (Year 2):|
|Issued capital||2500 EUR||Issued capital||2500 EUR|
|Unpaid capital||-2500 EUR||Unpaid capital||0 EUR|
|Retained earnings (loss)*||0 EUR||Retained earnings (loss)*||-1000 EUR|
|Annual period profit (loss)||-1000 EUR||Annual period profit (loss)||500 EUR|
|Total equity||-1000 EUR||Total equity||2000 EUR|
*The accumulated profit or loss from the previous financial years.
From the example above you can see that during the first financial year this company did not meet the legal requirements for the net assets (total equity). According to its first annual report, the total equity was negative instead of the required minimum of 1250 EUR (one-half of the share capital). The second year the total equity was more than the required minimum and there was no insufficient equity situation anymore.
According to our previous experience – the insufficient equity situation seems to be tolerated by the registrar during the first years after the establishment. You may receive a warning letter after the submission of the annual report, but it is usually meant to draw your attention to the issue, and let you know that they will check the status of your company’s equity again next year.
However, if the equity requirement remains unmet for several consecutive years, based on our experience, the registrar may issue a regulation obliging you as the shareholder to take concrete action, which usually means additional monetary or non-monetary contributions. The different measures for eliminating the insufficient equity situation are described in the Commercial Law (§ 176 Decrease of assets).
Please find more information on the topic from Xolo's self-service help modal article:
How to solve an insufficient equity situation?