Founding a company with 1 cent – 3 reasons why this is NOT a good idea

On 01.02.2023, new provisions entered into force in the Commercial Code and the Commercial Registry Act that broaden one’s options when choosing the amount of share capital for a limited liability company (LLC, or OÜ in Estonian). Following these changes, we can see LLCs with a share capital of just one euro cent. Let us now look at some of the options entrepreneurs face.

The amendments shall declare the existing official share capital minimum of 2 500 EUR null and void. The legislator believes that the currently existing share capital minimum, which has remained immutable since adopting the euro as the national currency, has become obsolete. Many LLCs utilise the 2 500 EUR minimum share capital requirement, proving that entrepreneurs are inclined to choose the minimum share capital. Since the obligation to perform share capital payment was abolished over a decade ago, many shareholders delay the payment to no end. The amendments pursue to refrain these situations from occurring. From here on, founders of an LLC ought to think carefully before deciding on the appropriate amount of share capital that suits the company best, rather than blindly choosing the current 2 500 EUR minimum share capital.

The minimum share capital has not been left without a trace. As the minimum nominal value of a share remains one cent, the new and unofficial minimum share capital is also one cent. Subsequently, an LLC with a share capital of 0.01 EUR can only have one shareholder. Although founding such an LLC is entirely possible and may seem even plausible, this strategy might not be the best solution in the long run. We shall provide three circumstances in which founding an LLC with a share capital of 0.01 EUR might prove unreasonable.

Attracting multiple shareholders

As the minimum share capital requirement of 0.01 EUR is also the minimum share value, an LLC with a share capital of 0.01 EUR can only accommodate a single shareholder. Consequently, such an LLC cannot attract more shareholders without increasing its share capital. The founder must also increase their nominal share value every time they increase the LLC’s share capital to retain suitable share proportions. Also, even if the founder could attract a round of investors, they must increase the share capital on every subsequent investment. Attracting investors creates multiple inconveniences, such as complex cap tables and some formalities.

Hence, founding an LLC in the way mentioned above is not the best idea when the founders aim to attract investors sometime in the future. In this case, a share capital of at least 100 EUR should be chosen, which can easily be broken up into shares.

Transferring shares

Transferring ownership of shares has a formal requirement by default, meaning that this contract has to be notarised. This requirement does not apply on the following conditions: the share capital is at least 10 000 EUR, the contributions have been paid in full, and the contract for transferring shares is prescribed in at least a format that can be reproduced in writing in the articles of association. Suppose the founders of an LLC foresee that multiple shares transfers will occur in the future. In that case, it is reasonable to found an LLC with a share capital of at least 10 000 EUR and appropriately specify the articles of association. Conversely, the contract has to be notarised every time the shares are transferred, causing a loss of time and money.

Personal liability

Amendments to the Commercial Code and the Bankruptcy Act establish the personal liability of shareholders in bankruptcy proceedings. Suppose the share capital of an LLC is below 2 500 EUR. In that case, the LLC is insolvent, and the LLC does not have funds to cover the expenses of the bankruptcy proceeding; the shareholders are personally liable for these expenses to the extent that the share capital falls below 2 500 EUR. This means that, in the case of a 100 EUR share capital, the shareholders are personally liable for 2 400 EUR. This new provision aims to avoid situations where the LLC did not have any funds and the bankruptcy proceeding was terminated by abatement. If the founders of an LLC wish to avoid personal liability in the case of insolvency, it would be wise to found an LLC with a share capital of at least 2 500 EUR. In this case, the shareholders are not personally liable in insolvency.

All in all, in the cases mentioned, the share capital should not be chosen according to the new unofficial minimum requirement, but it should be based on the real-life needs of each LLC.

If you have any questions regarding the information above, Hedman’s attorneys will be happy to advise you. 

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