Methods of recapitalizing a limited liability company.

The success of any limited liability company is based on the implementation of its shareholders’ investment plans and making profits. However, the way to achieve these goals is associated with the need to incur financial, personal and organizational outlays. The key moment is to bring about a situation in which the costs incurred will be covered by revenues and the company will start generating profits. This, in turn, translates into benefits for the shareholders who have invested in its development, taking on the associated risk.

In this article, we will present ways to recapitalize a limited liability company from internal funds. We will pay attention to solutions that will allow the company to provide the capital needed to run a business without the need to obtain external financing.

1. Increase of the share capital

A classic way to recapitalize a company is to increase the share capital with the participation of a notary. It consists in amending the articles of association, in which the new amount of the share capital and the number of shares held by individual shareholders are determined. Shareholders are obliged to cover their shares in the increased share capital, which involves contributing certain amounts of money to the company. After completing the necessary formalities, the change in the share capital is registered in the registry court (KRS).

An alternative to a traditional capital increase is to increase the share capital without the participation of a notary. This method is possible only if the articles of association contain appropriate provisions specifying the maximum amount of the share capital by which it may be increased under this procedure and specifying the date by which such an increase may take place.

The procedure for increasing the capital without a notary is simplified and does not require an amendment to the articles of association. However, it is necessary for the shareholders to adopt a resolution approving the increase in the capital, covering the shares in the increased share capital by the shareholders and registering the increase in the National Court Register.

2. Surcharges

Surcharges are an alternative way to recapitalize a limited liability company, allowing you to obtain funds from shareholders without having to change the structure of shares in the company. The mechanism of operation of the surcharges is based on the obligatory benefits of the shareholders for the benefit of the company, the rules of payment of which are regulated by the articles of association and specified in the resolution of the shareholders.

The surcharges are temporary, which means that the company is obliged to return the funds paid to the shareholders. The return is usually made after a certain period of time, e.g. after 2-3 years, or after the company has achieved its financial goals.

However, it should be noted that in certain situations it may not be possible to reimburse the surcharges. This applies to situations where the accumulated funds are necessary to cover losses disclosed in the financial statements. In such a situation, the shareholders must wait for the company’s financial condition to improve in order to recover their contributions.

3. Loans

Loans are one of the most flexible ways for a shareholder to recapitalize a limited liability company. Unlike additional payments and an increase in the share capital, loans do not involve the obligation of all shareholders to contribute funds and do not require a change in the company’s share structure.

Before concluding a loan agreement between a shareholder and a company, the provisions of the partnership agreement should be verified. It may specify additional conditions that must be met for the loan to be granted, e.g. the need to obtain the consent of the shareholders to conclude the agreement.

It is also important that the loan is granted on an arm’s length basis. This means that the interest rate on the loan should correspond to the interest rate that prevails on the market for this type of transaction. It should be remembered that a loan granted on preferential terms may be classified as a hidden surcharge, which is associated with tax consequences for both parties.

Additional regulations apply to loan agreements concluded between the company and a member of the management board. In such a situation, not only the consent of the shareholders is required, but also the representation of the company by a proxy appointed by a resolution of the shareholders.

The methods of recapitalization of a limited liability company presented in the article are an alternative to obtaining external financing. All of them are based on the use of funds from shareholders, giving them the opportunity to increase their involvement in the company.

The choice of the optimal method of recapitalization depends on the needs and situation of the company, it is worth paying attention to the following issues:

• The surcharges are temporary and the company is obliged to return them to the shareholders.
• The loans must be repaid by the company with interest.
• The increase in the share capital results in a permanent increase in the company’s equity.

Franciszek Horała

Attorney-at-law