What Is The Legal Reserve, And Do I Need To Appoint One?
The legal reserve (also known as a statutory reserve or legal reserve fund) is a mandatory portion of a company’s shareholders’ equity that must be set aside from the company’s profits to protect the company’s financial stability and provide a buffer against potential future losses. This requirement is outlined in the Estonian Commercial Code.
The primary purpose of the legal reserve is to safeguard the company’s capital by ensuring that a portion of profits is retained within the company. This reserve can be used in times of financial difficulty or to cover losses, protecting creditors and the company’s financial health.
The reserve is built up from the company’s annual net profits. At least 5% of the company’s annual net profit must be transferred to the legal reserve fund each year until the total reserve reaches 10% of the company’s share capital.
The legal reserve cannot be used for distribution to shareholders as dividends. It can, however, be used to cover losses if the company’s retained earnings are insufficient or for increasing share capital through a bonus issue of shares.
Both private limited liability companies (OÜ) and public limited companies (AS) in Estonia are required to build a legal reserve. However, private limited companies (OÜ) can opt out (read more about opting out below).
The legal basis for the legal reserve in Estonia is provided by the Estonian Commercial Code. Specifically, for private limited companies (OÜ), these rules are outlined in §160 of the Commercial Code.
For a private limited company (OÜ), it is possible to opt out of having a legal reserve when establishing or increasing share capital. This flexibility is a benefit of the OÜ structure, allowing the founders or shareholders to decide based on their financial strategy and needs. Public limited companies (AS), however, do not have this option and must maintain a legal reserve.
While AS (Public) companies cannot opt out of having a legal reserve, it's totally OK for an OÜ company to opt out of the legal reserve, and it can be beneficial when distributing the share capital later. If you are increasing your share capital, you can safely specify that your business has no legal reserve.
Purpose
The primary purpose of the legal reserve is to safeguard the company’s capital by ensuring that a portion of profits is retained within the company. This reserve can be used in times of financial difficulty or to cover losses, protecting creditors and the company’s financial health.
How the Legal Reserve Works
The reserve is built up from the company’s annual net profits. At least 5% of the company’s annual net profit must be transferred to the legal reserve fund each year until the total reserve reaches 10% of the company’s share capital.
The legal reserve cannot be used for distribution to shareholders as dividends. It can, however, be used to cover losses if the company’s retained earnings are insufficient or for increasing share capital through a bonus issue of shares.
Both private limited liability companies (OÜ) and public limited companies (AS) in Estonia are required to build a legal reserve. However, private limited companies (OÜ) can opt out (read more about opting out below).
The legal basis for the legal reserve in Estonia is provided by the Estonian Commercial Code. Specifically, for private limited companies (OÜ), these rules are outlined in §160 of the Commercial Code.
Is it mandatory?
For a private limited company (OÜ), it is possible to opt out of having a legal reserve when establishing or increasing share capital. This flexibility is a benefit of the OÜ structure, allowing the founders or shareholders to decide based on their financial strategy and needs. Public limited companies (AS), however, do not have this option and must maintain a legal reserve.
Should I add a legal reserve when I create the company or increase the share capital?
While AS (Public) companies cannot opt out of having a legal reserve, it's totally OK for an OÜ company to opt out of the legal reserve, and it can be beneficial when distributing the share capital later. If you are increasing your share capital, you can safely specify that your business has no legal reserve.
Updated on: 04/09/2024
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