Do you need a large or a small capital?, Tax and Business Law

Big or small social capital? This choice can have dire consequences. Therefore it must mature before the establishment of the company and throughout its life. Small business leaders think in terms of how much money they have, not how much money they need. It’s a mistake,” warns Pascal Veron, vice president of accounting firm Walter France.

Equity capital allows it to get started, finance its launch and avoid cash flow jitters during the first months of activity. That is why it must be carefully evaluated according to the investments to be made. “Obviously, the greater the urgent needs of the company, the greater the amount of capital that has to be adjusted and increased,” adds Pascal Ferron.

So not all companies are necessarily meant to have a large capitalization. An entrepreneur who starts a consulting business that requires nothing but a computer, or a family business that does not want to welcome investors, can be satisfied with a low capital.

Use the linked checking account

To enhance their financial credibility, initially or at a later time, entrepreneurs can fund their company’s current account. Instead of having a capital of 100,000 euros, this amount can be divided between the capital and the partner’s current account. Financial institutions generally take these contributions into account before granting loans. But they sometimes ask to close the checking account for a certain period of time. This means that the commander cannot recover that amount for five years overall,” says the chartered accountant.

Too little social capital can punish the structure. If the company records losses, and the shareholders’ equity on the balance sheet becomes less than half of the capital, the law provides that the partners must decide, within four months after approval of the accounts showing this loss, if possible, when to dissolve the company early.

For example, a company whose capital is fixed at 10,000 euros incurs a loss of 7,000 euros. Thus, the amount of equity amounts to 3000 euros, and therefore it is less than half of the capital. “The partners’ decision provided for in Article L.223-42 shall be published in a newspaper authorized to receive statutory advertisements, filed with the Registry of the Commercial Court and registered in the Register of Commerce and Companies,” comments Gwenel Bodenes, Head of the Legal Department of Advisia, a law firm of Cerfrance Finistère. .

Divide the capital to double the shares

Thereafter, the capital also becomes a general and financial communication component, particularly indicated on all company invoices. Thus, potential future suppliers may see a lack of credibility or financial strength.

Lack of social capital can also be a problem when you want to open up capital or get financing. This would hinder financial partners. If an application is submitted for financing, the lending institution will require that the founders personally provide a portion of the need for financing, up to one-third of the total amount. Pascal Ferron asserts: “If the manager puts 100 in his capital or in the partner’s current account, the bank will lend 200.”

However, instead of increasing its share capital, when the company welcomes new investors, it can also choose to split it up. Pascal Ferron explains: “A company that has 100 shares at a price of 1,000 euros will divide the par and increase the number of shares to become, say, 10,000 at a price of 10 euros.” What is the benefit of doubling the number of shares in this way? A fast-growing company that grows the value of its individual stake can ensure that entry tickets become affordable for new investors.

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