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Under what conditions can the charter capital be reduced or the LLC be liquidated?
Under what conditions can the charter capital be reduced or the LLC be liquidated?
Recently, one of the issues concerning business entities, including the owners of limited liability companies (LLCs), is the reduction of net assets in relation to charter capital. Tax expert Altay Jafarov clarifies the questions arising on the subject.
According to Article 90.4 of the Civil Code of the Republic of Azerbaijan, if by the end of the second or any subsequent financial year, the value of the net assets of an LLC is less than its charter capital, the company is obliged to declare the reduction of its charter capital and register it in the prescribed manner. If the value of the company's net assets is less than the minimum amount of charter capital, the company must be liquidated.
What are net assets? What is the charter capital and its minimum amount? How should this reduction be carried out?
The concept of charter capital for LLCs is regulated by Article 90.1 of the Civil Code. Article 90.1 states that the charter capital of a limited liability company consists of the contributions of its participants. The charter capital determines the minimum amount of property that guarantees the interests of the company's creditors. The minimum amount of charter capital is the sum of the amounts considered during the company's initial registration and any subsequent increases.
Net assets are calculated based on the International Financial Reporting Standards, the Tax Code, the Civil Code, and other normative acts as follows:
Net assets = Assets – Liabilities
Thus, the charter capital is included within the net assets.
Now, let me explain with examples.
Example 1:
"AA" LLC's charter capital is 10,000 manats. The company's assets amount to 90,000 manats, and its liabilities are 60,000 manats. In this case, what are the net assets of the LLC, and should the company be liquidated?
First, let's determine the value of the company's net assets:
90,000 – 60,000 = 30,000 manats.
Now let's compare the charter capital with the net assets.
30,000 manats (net assets) > 10,000 (charter capital).
Therefore, in this case, there is no need for the company to be liquidated or for its charter capital to be reduced.
Example 2:
"BB" LLC's charter capital is 10,000 manats. The company's assets amount to 90,000 manats, and its liabilities are 85,000 manats. In this case, what are the net assets of the LLC, and should the company be liquidated?
As in the first example, the net assets will be calculated as 5,000 manats.
Now let's compare the net assets with the charter capital.
Net assets (5,000) < charter capital (10,000).
As we can see, the amount of the LLC's net assets is 5,000 manats less than the charter capital. Therefore, the company does not need to be liquidated, but it must declare the reduction of its charter capital by 5,000 manats and register it in the prescribed manner.
Example 3:
Here, the conditions are the same as in the previous examples, but the liabilities amount to 105,000 manats. In this case, the value of the net assets becomes -15,000 manats. That is, the liabilities exceed the assets, and the net assets are negative.
As a result, it can be seen that the net assets are 25,000 manats less than the charter capital of the LLC, which is 10,000 manats.
The essence is that the company has used its charter capital and even incurred an additional 15,000 manats of debt to creditors. Therefore, since the charter capital is less than the net assets, the company must be liquidated.
Should LLCs monitor these nuances every year?
According to Article 90.4 of the Civil Code, LLCs must conduct these calculations in the manner described above starting from the second year of operation, after the end of the reporting year.
Who is responsible for liquidation?
Of course, the obligation and authority to liquidate LLCs rest directly with the company's founders. The law does not provide for any penalties for failure to liquidate in such cases. However, the authorities responsible for state registration (the tax authorities for LLCs) may require the liquidation of the company in such cases.
Recently, one of the issues concerning business entities, including the owners of limited liability companies (LLCs), is the reduction of net assets in relation to charter capital. Tax expert Altay Jafarov clarifies the questions arising on the subject.
According to Article 90.4 of the Civil Code of the Republic of Azerbaijan, if by the end of the second or any subsequent financial year, the value of the net assets of an LLC is less than its charter capital, the company is obliged to declare the reduction of its charter capital and register it in the prescribed manner. If the value of the company's net assets is less than the minimum amount of charter capital, the company must be liquidated.
What are net assets? What is the charter capital and its minimum amount? How should this reduction be carried out?
The concept of charter capital for LLCs is regulated by Article 90.1 of the Civil Code. Article 90.1 states that the charter capital of a limited liability company consists of the contributions of its participants. The charter capital determines the minimum amount of property that guarantees the interests of the company's creditors. The minimum amount of charter capital is the sum of the amounts considered during the company's initial registration and any subsequent increases.
Net assets are calculated based on the International Financial Reporting Standards, the Tax Code, the Civil Code, and other normative acts as follows:
Net assets = Assets – Liabilities
Thus, the charter capital is included within the net assets.
Now, let me explain with examples.
Example 1:
"AA" LLC's charter capital is 10,000 manats. The company's assets amount to 90,000 manats, and its liabilities are 60,000 manats. In this case, what are the net assets of the LLC, and should the company be liquidated?
First, let's determine the value of the company's net assets:
90,000 – 60,000 = 30,000 manats.
Now let's compare the charter capital with the net assets.
30,000 manats (net assets) > 10,000 (charter capital).
Therefore, in this case, there is no need for the company to be liquidated or for its charter capital to be reduced.
Example 2:
"BB" LLC's charter capital is 10,000 manats. The company's assets amount to 90,000 manats, and its liabilities are 85,000 manats. In this case, what are the net assets of the LLC, and should the company be liquidated?
As in the first example, the net assets will be calculated as 5,000 manats.
Now let's compare the net assets with the charter capital.
Net assets (5,000) < charter capital (10,000).
As we can see, the amount of the LLC's net assets is 5,000 manats less than the charter capital. Therefore, the company does not need to be liquidated, but it must declare the reduction of its charter capital by 5,000 manats and register it in the prescribed manner.
Example 3:
Here, the conditions are the same as in the previous examples, but the liabilities amount to 105,000 manats. In this case, the value of the net assets becomes -15,000 manats. That is, the liabilities exceed the assets, and the net assets are negative.
As a result, it can be seen that the net assets are 25,000 manats less than the charter capital of the LLC, which is 10,000 manats.
The essence is that the company has used its charter capital and even incurred an additional 15,000 manats of debt to creditors. Therefore, since the charter capital is less than the net assets, the company must be liquidated.
Should LLCs monitor these nuances every year?
According to Article 90.4 of the Civil Code, LLCs must conduct these calculations in the manner described above starting from the second year of operation, after the end of the reporting year.
Who is responsible for liquidation?
Of course, the obligation and authority to liquidate LLCs rest directly with the company's founders. The law does not provide for any penalties for failure to liquidate in such cases. However, the authorities responsible for state registration (the tax authorities for LLCs) may require the liquidation of the company in such cases.