SA or SRL: should I consider choosing a higher starting capital?
Romanian law sets a minimum equity capital amount for an SRL at 200 RON (about 55 EUR), and 90,000 RON (about 25,000 EUR) for an SA. We will examine now why it may be preferable to incorporate a company with a higher equity capital than the minimum required.
Capital – the first source of financing for a company
Equity capital represents the primary source of financing of a company, at least initially. It may be in the interest of the founders to incorporate a company with a higher equity capital than the minimum set by law so that the company does not have to resort to taking out a loan (from its associates) for incorporation and start up costs (fees, taxes, etc.).
This capital is the most stable resource of the company and the amount should be enough to ensure that the business plan can be carried out (even the most profitable activities can require a lot of cash up front). The advice of CPA can be very useful at this stage.
Capital is also often an indicator of security and stability for the company's bankers who may be dissuaded from doing business with a company if the associates are not themselves serious investors.
In short, as the company's equity capital is often displayed on invoices, company headers, etc., it the most visible (although perhaps not the most precise) indicator of the company's financial security.
Equity Capital – denominator of the debt ratio
Romanian tax law limits the deductible interest of undercapitalized Romanian companies.
In the terms of Romanian tax law, loan interest is not deductible unless the ratio (loaned capital / equity capital) is less than 3.
Equity Capital – buffer for accounting losses
Romanian corporate law provides for the possibility of the dissolution of companies when the accounting losses represent more than half the equity capital.
When the managing directors find that the net assets of the company are less than half the equity capital of the company, they must then hold an extraordinary shareholders meeting to take one of the following decisions:
- inject equity capital
- reduce equity capital the the residual value
- dissolve the company
The net asset value of a company is calculated according to this formula: total company assets – total company debts = net assets of the company.
A favorable tax regime for raising capital in Romania
According to current Romanian legislation, companies raising capital at incorporation (or for an increase in capital) are not hit with a proportional capital tax.
This can be an opportunity when incorporating a company with a substantial amount of equity capital.
Romania is likely to increase the minimum amount of equity capital required to form SA and SRL companies
An increase in the legal minimum equity capital required to form a Romanian SA or SRL can be expected in the future.
Should this occur, Romanian companies will have to hold a General Shareholders meeting to increase the equity capital to conform with the new provisions of the law.
Conclusion
The amount of equity capital of a company should be determined in terms of the profitability of the company (especially for the first years of incorporation), and its projected cash needs.
It is inadvisable to underestimate the amount of equity capital, without which the company will be forced to increase its capital at the risk of putting its growth and even its future in danger. At the same time it is also risky to overestimate the amount required as the invested equity capital cannot be easily recovered by the shareholders/associates.
By Denis Colin
Certified Public Accountant in the Order of Certified Public Accountants of Bucharest (CECCAR)