Increasing share capital by capitalizing reserves: the method

A company's capital, and in particular its shareholders' equity, is a measure of its financial stability and its ability to cope with market risks.

In a context of increasing competition, companies wishing to expand and penetrate new markets must have solid economic foundations.

Increasing share capital by capitalizing reserves is one of the most commonly used methods.

This involves transforming the company's reserves into share capital. This operation enables the company to increase the number or par value of its shares, but deprives it of additional funds that could be invested for growth.

It is important to note that the intrinsic value of the company and that of shareholders' equity remain unchanged.

Above all, it makes it possible to avoid soliciting partners for new contributions.

Finally, the articles of association of many SARLs and SASs tend to favor this method, which is much less restrictive from an administrative point of view. Here's how it works.

When is it necessary to increase capital by capitalizing reserves?

The first essential condition is, of course, to have sufficiently large reserves

They come from the gross operating surplus generated by the company. Secondly, the accounts for the last financial year for which the accounts have been closed must have been approved.

Reserves that can be mobilized must be eligible for inclusion in share capital. Statutory reserves, exceptional reserves and optional reserves may be incorporated. Profits from the previous year, retained earnings and any bonuses received may also be allocated for this purpose.

This approach is particularly useful when you want to :

• Reinforce your company's financial strength and send a strong signal to all stakeholders
• Benefit from greater economic stability and cope with changing market conditions
• Prepare the implementation of your strategic growth policies, or of funds useful to the company's growth.

What to do?

The first step is to formalize the partners' intention to carry out such a capital increase.

The procedure to be followed is defined in the company's articles of association, and may vary from case to case.

Next, it is essential to complete a number of administrative formalities, some of which can be quite burdensome. The first is to update the company's articles of association, so that the decision can be formalized. Indeed, any change in share capital must be reflected in a corresponding update of the articles of association.

The next step is to issue a publication notice in an approved legal gazette to inform the general public of your decision. This summarizes all the essential information about your company, and mentions the decision to increase the share capital and the new amount.

You must then submit the minutes of the share capital increase to the tax authorities. They will require you to pay registration fees. The final step is to inform the relevant CFE (Centre de Formalités des Entreprises), enclosing all the documents listed above. You will receive a new, updated Kbis extract.

How do you account for this transaction?

The PCG (Plan Comptable Général - General Accounting Plan), the European accounting standard applied throughout France, requires that the date of the collective decision of the partners be used as the official date for recording the capital increase.

The amount of the increase is debited from "Reserves" (n°106), "Retained earnings" (n°110) or "Net income for the year" (n°120), depending on the source of the funds. The amount of the increase is credited to the "Capital" account (n°1013).

A capital increase is not a simple operation to carry out

Beyond the financial constraints, the numerous administrative formalities involved can be daunting and time-consuming for business owners.

Although this type of transaction is generally favored by associates as a way of establishing their company's credibility, it is a simple accounting operation that does not really involve a transfer of funds.

The procedure must be carried out with the utmost rigor to avoid any pitfalls and avoid bogging the company down in an often restrictive administrative morass that can delay the proper application of your strategic development policies.