INVESTING IN MY COMPANY

Recently, many of our clients have expressed their interest in making new investments in their company for many different reasons. This money can be necessary for basic factors, such as: renting an office space or warehouse, paying first month salaries, buying materials and product. Or, for more complicated reasons, like regulating an equity imbalance or helping the company out of a legal dissolution situation.

In this sense, the first corporate operation that springs to mind is, of course, a Share Capital Increase. This is one of the most common options as it is a well-known and straight-forward process. Simply, money goes into the account to be used by the company.

However, clients seem to ignore other possibilities that could work best for them, these being: loan agreements and shareholder contributions.

3 options to make new investments in your company

We are now going to discuss these three options and establish which one could work best for you.

All three corporate operations have the same goal of providing equity to the company. The first type is a share capital increase. This is the strictest one, following certain rules established by the Capital Companies Act and Commercial Registry Regulations. Most importantly, it must be done through a public deed signed before a Notary.

Next, shareholder contributions happen without prior formalities, simply via a bank transfer to the company’s bank account. This makes the process much more straightforward. However, this equity won’t be part of the capital and will entail no obligation or grant any right to the shareholder to receive repayment. The intention behind this transaction is normally to restore the company’s liquidity situation.

Lastly, a loan agreement is a well-known process. In this arrangement the shareholder deposits funds into the company’s account with a right to repayment with interest. This corporate operation should be done via a formal contract signed by both parties and presented to the Tax Agency. Avoiding the loaned amount to be considered a shareholder contribution.

Pros and Cons

To establish the most beneficial way to proceed, we will discuss the pros and cons of each operation.

1. Share capital increase must be signed before a notary which means an additional cost. Also, a Share capital increase means that, in the event any legal issue arises with the company, it will be liable for a larger amount (minimum share capital in Spain is 3.000 EUR).
2. Companies with a larger Share Capital usually are seen as stronger and more secure to contract commercial relations with. They will also have less difficulty obtaining bank loans / guarantees or lease agreements.
3. Shareholder contributions are very quick and simple as they do not require a formula document signed before a notary of inscription in the Commercial Registry.
4. The amount transferred as a shareholder contribution does not provide any obligation of repayment. However, it is important to establish that if there are two or more shareholders, all of them must contribute proportionally to their share in the share capital, as failure to do so will be considered a capital gain and will be subject to taxation.
5. Loan Agreements guarantee repayment as they are formalised via a contract (this is important so that the equity is not considered a shareholder contribution), which gives the lender more security. Also, a loan may be granted by a third party and therefore does not need to come from a shareholder.
6. The issue is that the loan must be repaid with interest which cannot be below the legal price of money (3% for 2022).
7. All three investment figures share a common benefit: they are transactions that are not subject to taxation in Spain.

Consider the intention behind the equity increase. If a company is saving itself from a financial imbalance or legal dissolution situation, then the best option is to quickly proceed with a shareholder contribution.

If you wish to have a more serious and stable image for your growing company, it is wise to increase the share capital.

Lastly, if there’s a specific investment you wish to make through the company but it does not have enough funds, you can loan the money to the company and set the terms which work best for you in the agreement.

Lexidy Can Help

Our team of English-speaking Corporate lawyers at Lexidy can effectively advise on such matters. Always helping you and your company yield the best results is our job!