Important Considerations in Increasing an LLC’s Reserve Capital

There is a range of important aspects you should be aware of when it comes to increasing an LLC's reserve capital. That’s precisely what we will be going over today.

Aspect #1

In the process of creating an LLC, it is imperative that you read the articles of association carefully!

Our practice has shown that almost nobody reads their LLC’s articles of association. All too often, lawyers end up discovering at the worst possible the oddities that its authors decided to write into it their articles of association (often people who created a template somewhere across the far reaches of the Internet).

For instance, an articles of association may entail provisions on the following:

• a prohibition on the reserve capital being increased at the expense of third-party investments;
• the number of votes required to pass an affirmative decision to increase the reserve capital. By law this percentage must be at least 2/3, but a higher required percentage or  a unanimous vote can be adopted as well if the company so chooses.

In the first case, a prohibition of third-party investments will also have to be removed from the articles of association as well (if it's necessary to accept third parties into the LLC). As for the second case, a unanimous decision will have to be made, or if another percentage of the vote is adopted, then at least that indicated percentage of votes will be required for any resolution to pass.

Aspect #2

The meeting format

Article 38 item 1 of Federal law “On LLC’s” does not prohibit shareholders meetings including among their agendas a potential increase to the reserve capital from taking place in the form of voting by correspondence. However, article 17 item 3 of this Federal law orders that passed resolutions at a shareholders meeting be notarized, which will require it to be conducted in person.  

Aspect #3

Increasing the reserve capital by way of shareholder investments or by way of third-party investments – what’s the difference?

At first blush, it may appear as though “Well, in both cases the reserve capital is being increased. What does it matter who’s making the investment?” There is, however, a difference. If a reserve capital is only increased at the expense of the shareholders, it will require two meetings: a first meeting is convened to adopt a meeting to raise it while at the second to finalize the transaction. A notary will only be necessary during the first meeting whereas the amendments will need to be submitted to the USRLE after the second meeting is held.

However, if the reserve capital is increased at the expense of third parties, only one meeting will take place. At that meeting, a decision will also need to be made on registering the amendments at the USRLE. Furthermore, a notary will be needed at this stage as well.

Aspect #4

Notary requirements for documents

If it is the first time a notary has ever worked with you, it will most likely require all of the company's documents that have been produced since your company’s inception: certificates, records forms, editions of its articles of association, any amendments to it, and all of its past adopted resolutions.

Unfortunately, not every company can boast being a record-keeping ace. If any documents are lost, that means they will have to be reproduced.

Furthermore, a notary may require documents certifying payment for the shares. Those may be receipts from a bank, an accountable form when money is entered into the LLC's register, and a property acceptance-transfer certificate (in the case that the reserve capital was increased by way of a property investment rather than a monetary investment). In the latter case, an evaluation will also have to be ordered from an independent evaluator.

Aspect #5

Spouse consent

In some cases, a notary may require the consent of a shareholder’s spouse to authorize an increase in a reserve capital.

Increasing a reserve capital by way of a third-party investment muddles shares from a percentage standpoint despite the fact that investments being made into the LLC causes the market value of the shares to rise anyway. On the other hand, it’s best to process this consent if there is a risk that the transaction will be disputed, for instance in the case of a corporate conflict.

Want to increase (decrease) your reserve capital or make other changes to your LLC’s documents? Get in touch with us by sending us an email!