What is capitalization of reserves?
Capitalization of reserves refers to a company's decision to retain profits rather than distribute them as dividends to shareholders. These profits are accumulated and converted into reserves, which are used for self-financing purposes, such as investments or increasing the company's share capital.
This approach strengthens the financial structure of society without depending on external sources of financing.
What is a capital increase charged to reserves?
The capital increase against reserves is an accounting operation aimed at converting accumulated reserves into share capital to improve the financial stability of the company. There are various ways to carry out this increase, which include the creation of new shares, the issuance of new shares or the increase in the nominal value of existing ones.
The Capital Companies Law is responsible for regulating this type of capital increase and establishes specific requirements in Spain.
Capital increase as a business financing tool
The capital increase is an essential business financing tool that allows the company's own funds to be increased, either through existing shareholders or through the use of reserves or retained earnings.
Generally, the responsibility for presenting the capital increase proposal to the shareholders meeting falls on the Board of Directors or the sole administrator, if there is one. However, the law allows any shareholder with more than 5% ownership to request the calling of a meeting to discuss any company issue that must be put to a vote, including the increase of share capital.
Procedure for increasing capital from reserves
When it is decided to increase the capital through reserves, the available reserves can be used, those generated by the issuance of shares or the assumption of social participations, and the legal reserve in its entirety in the case of limited liability companies, or in part that exceeds ten percent of the capital already increased in the case of public limited companies.
It is crucial to highlight that this capital increase does not imply the distribution of profits among the partners, since their participation remains the same; the guarantee for third parties is simply increased.
To carry out this operation, it is necessary to have a balance sheet approved by the general meeting that refers to a date no older than 6 months before the capital increase agreement. This balance sheet must be verified by the company's auditor or by an auditor designated by the Commercial Registry, if the company is not obliged to verify its accounts.
In summary, increasing capital from reserves is a strategy commonly used by companies to finance their long-term operations and projects, thus strengthening their financial position in the market.
