A limited liability company is the most common legal form of business entity in Ukraine. This is due to the convenience of LLC management mechanisms, and therefore their acceptability for small and medium-sized businesses.
The formation of the authorized capital is a mandatory stage of establishing an LLC, the basic rules and requirements that must be followed.
The concept of “Authorized Capital of an LLC” and Its Composition.
Until 2018, there was no single code or special law in Ukraine that would determine the legal status of limited liability companies (LLCs) in general and the authorized capital of such companies. The situation has changed with the adoption of the Law of Ukraine “On Limited and Additional Liability Companies” No. 2275 – VIII” dated February 6, 2018 (hereinafter – Law No. 2275), which, in comparison with Law No. 1576, regulates in more detail the issues of creation and operation of LLC — a separate chapter (III) is devoted to the issues of authorized capital and contributions of participants.
What is the Authorized Capital of an LLC from the Point of View of the Legislator?
According to Article 87 of the Commercial Code of Ukraine, the authorized capital of a business company is the sum of contributions of its founders and participants. However, with the entry into force of Law No. 2275, the corresponding Article of the Commercial Code of Ukraine was deleted. However, this does not change the essence: the authorized capital is a set of various values that the participants agreed to give to the LLC for use by the latter in economic activities.
What Exactly can be Added to the Authorized Capital of an LLC, or in What Forms Can such Contributions be Made?
Firstly, the answer to this question is contained in Part 1 of Article 13 of Law No. 2275, according to which the contribution of a company participant may be money, securities, or other property unless otherwise established by law. According to Part 1 of Article 190 of the Civil Code of Ukraine, property as a special object shall be considered a separate thing, a set of things, as well as property rights and obligations.
Under Part Two of Article 13 of the Law on Companies, a company may not provide a loan to pay for a participant’s contribution or a guarantee for loans or credits provided by a third party to pay for its contribution.
Thus, property rights arising in the company’s loan relations with its founder based on security — promissory note — cannot be a contribution to the authorized capital of a business company”.
At the same time, the legislation does not prohibit the formation of the authorized capital of a company by depositing funds received by a participant in the form of repayable financial assistance not from such a company, but from another person”.
Separate exceptions to the composition of the authorized capital are also provided for by the legislation.
Article 86 of the Commercial Code of Ukraine prohibits the use of such objects for the formation of the company’s authorized (pooled) capital:
- budget funds;
- property of state (municipal) enterprises that is not subject to privatization according to the law (decision of the local self-government body);
- property that is under the operational management of budgetary institutions, unless otherwise provided by law.
In addition, we note that traditionally for Ukrainian legislation, the list of exceptions given in Article 86 of the Commercial Code of Ukraine is not exhaustive.
Thus, guided by the general provisions of civil legislation (Article 178 of the Civil Code of Ukraine), objects of civil rights whose stay in civil circulation is not allowed (objects withdrawn from civil circulation), as well as objects that can belong only to certain participants in the turnover or whose stay in civil circulation is allowed with a special permit (objects that are limited turnover), cannot be contributions.
By the time the authorized capital of an LLC is formed, the founders must check whether their future contributions are not included in the list of objects that, according to the legislation, cannot be contributions to the authorized capital of an LLC.
Special attention must be paid to special legislation, which often contains references to specific objects of civil rights that are prohibited from being included in the authorized capital of an LLC.
For example: according to clause 14, Section X “Transitional Provisions” of the Land Code of Ukraine before the entry into force of the law on the turnover of agricultural land, but no earlier than January 1, 2020, it is prohibited to include the right to a land share in the authorized capital of business entities.
A non-monetary contribution must have a monetary value, which is approved by a unanimous resolution of the general meeting of participants, in which all (!) members of the company took part. When creating a company, such an assessment is determined by the resolution of the founders to establish a company (Part 3 of Article 13 of Law No. 2275).
Similarly, this issue is regulated by Part 2 of Article 115 of the Civil Code of Ukraine. However, with a slight clarification: in cases established by law, the monetary assessment of the contribution of a business entity participant is subject to independent expert verification.
Amount of the Authorized Capital of an LLC
The issue that traditionally concerns participants before establishing an LLC is the legal requirements for the authorized capital. Article 12 of Law No. 2275 stipulates that the amount of the authorized capital of an LLC consists of the nominal value of the shares of its participants expressed in the national currency of Ukraine, and at the same time stipulates that the amount of the share of a company participant in the authorized capital of the company can be additionally determined as a percentage.
What is the minimum amount of the authorized capital of an LLC?
For a long time, the legislation of Ukraine established fixed limits on the authorized capital of an LLC, which participants had to fulfil. This fixed minimum amount of the authorized capital of an LLC has changed several times.
Currently, there are no legal requirements regarding the amount of the authorized capital of an LLC.
The parties have the right, at their own discretion, to decide what amount of the authorized capital the company will have.
At the same time, the founders must consider that according to established practice, the authorized capital of the company determines the minimum amount of the company’s property, and this guarantees the interests of its creditors. Therefore, it is natural that the larger the authorized capital of an LLC, the safer cooperation with it will be for counterparties. The amount of the authorized capital agreed by the founders must be fixed in the constituent document — the Charter of the LLC (Part 4 of Article 57 of the Commercial Code of Ukraine).
Terms of Formation of the Authorized Capital
Article 14 of Law No. 2275 stipulates that each participant of the company must make a full contribution within 6 months from the date of state registration of the LLC unless otherwise provided by the charter. The relevant provisions may be included in the charter, amended, or excluded from it by a unanimous resolution of the general meeting of participants, in which all participants of the company took part. The value of the contribution of each participant of the company must not be less than the nominal value of its share.
Confirmation of the fact of adding a property to the authorized capital can serve, for example, the acceptance and transfer act of property, delivery of a bill of lading or another property disposal document. At the same time, since the right of ownership to real estate arises from the moment of state registration (Part 2 of Article 3 of Law No. 1952), if the founder’s contribution defines a building or land plot, the date of making the relevant property in the authorized capital will be considered the date of making an entry on the change of ownership in the State Register of Property Rights to Real Estate. All its participants must make their contribution to the authorized capital of an LLC.
Procedure for Changing the Amount of the Authorized Capital of an LLC
When carrying out business activities in an LLC, it may often be necessary to decide on changing (increasing or decreasing) the amount of the authorized capital. The legislation of Ukraine establishes the right of the company to make such a decision but considering certain legislative features.
First of all, it is worth remembering that making a decision on changing the amount of the authorized capital of an LLC falls within the exclusive competence of the LLC’s general meeting of participants (clause 3, Part 2, Article 30 of Law No. 2275). This means that neither the director of an LLC nor any of its participants have the right to independently — without a resolution of the general meeting — increase or decrease the amount of the authorized capital of the company.
Since information on the amount of the authorized capital and the amount of the share of each of the founders (participants) is subject to entry into the Unified State Register of Legal Entities, Individual Entrepreneurs and Public Formations (clause 15, Part 2, Article 9 of Law No. 755), the resolution of the general meeting on changing the amount of the authorized capital comes into force no earlier than the date of registration of the relevant changes.
It is allowed to decide on increasing the authorized capital of an LLC only after all its participants have made contributions in full. An increase in the authorized capital of a company that owns a share in its own authorized capital is not allowed (Parts 1, 2 of Article 16 of Law No. 2275). The authorized capital of an LLC can be increased either with the help of additional deposits (participants and/or third parties) or at the expense of retained earnings.
In case of an increase in the authorized capital due to additional deposits, the nominal value of the company’s participant’s share may be increased by an amount equal to or less than the value of the additional contribution of such participant (Part 3 of Article 16 of Law No. 2275). When the authorized capital is increased at the expense of the company’s retained earnings without attracting additional contributions, the composition of the company’s participants and the ratio of their shares in the authorized capital do not change (Part 2 of Article 17 of Law No. 2275).
There are also certain legislative features regarding reducing the amount of the authorized capital of an LLC. They are primarily because reducing the amount of the authorized capital of an LLC is important for the counterparties of this company.
Part 3 of Article 19 of Law No. 2275 stipulates that after deciding to reduce the authorized capital of an LLC, its executive body must notify each creditor whose claims against the company are not secured by a pledge, guarantee or guarantee of such a decision within 10 days.
In the event of a decrease in the nominal value of the shares of all the company’s participants, the ratio of the nominal value of their shares must remain unchanged (Part 2 of Article 19 of Law No. 2275).
Consequences of Incomplete Formation of the Authorized Capital of an LLC
As we have already noted, unless otherwise specified in the charter, LLC participants must form the authorized capital within 6 months from the date of state registration of the LLC. At the same time, the legislation also regulates cases when the company’s participants have not made or have not fully made their contributions to the authorized capital within the established period — see Article 15 of Law No. 2275.
Thus, in case of late payment of a contribution by a participant, the company’s executive body must send him/her a written warning about the delay. The latter must contain information about the contribution or part thereof that was not made in a timely manner and the additional period provided for repayment of the debt. This period is established by the company’s executive body or charter and must not exceed 30 days.
If the LLC participant does not fully fulfil its obligations to contribute to the authorized capital even within the additional period allotted to it, the meeting of participants convened by the LLC’s executive body may make one of the following resolutions:
- on the exclusion of a company participant who is in arrears in contributing;
- on reducing the authorized capital of the company by the amount of the unpaid part of the share of the company’s participant;
- on the redistribution of unpaid share (part of share) among the other company’s members without changing the amount of the authorized capital and payment of such debt relevant stakeholders;
- on the company’s liquidation.
If the relevant decision is made, the votes that fall on the share of a participant who is in arrears to the company are not considered when determining the voting results. The LLC is obliged to maintain the availability of assets with a value not less than the amount of the authorized capital.