Attorney explains: capital requirements of a LLC
Since the enforcement of the first Commercial Code in 1995, Estonian law has required all private limited companies to have a certain minimum share capital.
Originally, this amount was 40,000 kroons, which was a considerable sum at the time. After the adoption of the euro, it became 2,500 euros, and for natural persons, the option to postpone the capital contribution indefinitely was created, meaning the establishment of a private limited company without making the contribution.
The created option proved to be very popular among founders, and subsequently, the majority of private limited companies were established without a capital contribution. Now the time has come when the minimum capital requirement has been completely abolished.
Capital requirement
Throughout history, the obligation to make a certain amount of share capital contribution has primarily served the purpose of protecting the creditors of the private limited company. The size of the share capital was a kind of indication of the company's solvency because it showed the extent to which the company had assets. If the net assets of the private limited company fell below the minimum capital requirement specified by law, the shareholders had to quickly resolve the situation, and broadly speaking, the principle of "liquidate or recapitalize" applied.
Since the requirement to maintain net assets always had to be fulfilled, this provided creditors with the assurance that even if the company failed, at least to the extent corresponding to the minimum capital, their claims would still be satisfied.
The situation changed when the Commercial Code introduced the option to establish a private limited company without making a capital contribution. Since these companies established without contributions had no net assets, they could not be subject to the same requirements as conventional private limited companies. However, this meant that the interests of creditors were no longer protected in the same way as in the case of conventional private limited companies.
In the case of private limited companies established in this new way, the interests of creditors were secured through monetary claims against the shareholders instead of paid-up capital. Until the shareholders had fully paid their contributions, they were personally liable for the company's obligations to the extent of their unpaid contributions. A similar model of creditor protection has been used as a reference point for abolishing the minimum capital requirement.
New rules
Starting from January 1, 2023, the Commercial Code no longer directly stipulates the minimum size of share capital. However, indirectly, such a requirement can still be inferred from the fact that the smallest nominal value of a share is one cent, and payment for a share must be at least its nominal value. Nevertheless, the obligation to make a contribution equivalent to one cent could indeed be considered so symbolic that it could be referred to as the absence of a minimum capital requirement in the explanatory memorandum of the law proposal. However, how is creditor protection ensured when the share capital of a private limited company is one cent?
In broad terms, the essence of the law has not actually changed, and the magical figure remains at 2,500 euros. This means that in substance, the newly established company still needs to be capitalized to the same extent, and if it isn't, the shareholders are personally liable with their assets. This corresponding rule has been added to the Bankruptcy Act, stating that if the share capital of a private limited company is below 2,500 euros and the temporary administrator fails to satisfy their claim from the debtor's other assets, the temporary administrator has the right to demand payment and reimbursement of expenses from the shareholders to the extent that falls between the share capital of the private limited company and 2,500 euros. In other words, just as in the case of private limited companies established without contributions, the shareholders' liability applies to the same extent, even in the event of the termination of bankruptcy proceedings.
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