Investors often face the challenge of deciding how to inject the capital necessary to start or sustain the operations of a company. This challenge stems from the fact that investors want to invest funds to improve company’s liquidity, while avoiding the process of increasing the company's registered share capital.

Considering this we will explore financing options for a limited liability company (LLC) that do not require increasing its registered share capital. Specifically, we will compare the two most popular financing methods: shareholder loans and additional contributions to the company. We will also explore the similarities and differences between these options.

Loan

The loan is a relatively straightforward mechanism for financing a company. Investors typically prefer this method over additional contributions because it does not require unanimous consent in decision-making. Moreover, the repayment process is simpler since the repayment of additional contributions is subject to rules that regulate the procedure for reducing the registered share capital. Moreover, unlike additional contributions, a loan does not necessarily have to be in cash, adding to its attractiveness. Finally, in the case of the company’s insolvency, loans are prioritized over additional contributions in terms of claims by shareholders against the company.

To provide a loan, it is necessary to conclude a Loan Agreement between the shareholders(s), as lender(s), and the company, as borrower. The Loan Agreement should specify the loan terms, the repayment date, disbursement date, when each installment is due, and the deadline for the company to utilize the loan.

However, this financing method has notable disadvantages. Unlike additional contributions, the company must pay interest, which raises additional tax issues, such as income recognition and taxation of interest. Furthermore, the exchange rates can fluctuate daily, further complicating repayments.

When the company's shareholders are foreign entities, another significant drawback is that the Loan Agreement must be registered with the National Bank of Serbia, and the loan must be repaid according to a specified schedule. Additionally, certain documents are required, such as the assembly’s decision on the loan, a statement of the loan’s purpose, and an excerpt from the foreign lender’s business registry. This process often necessitates coordination with the company’s bank, accountants and tax experts. All these factors further reduce the flexibility of this financing method.

It is also important to consider situations where the contract is between related parties, since the participants must comply transfer pricing and thin capitalization rules.

A loan is a straightforward financing option that offers benefits such as simplicity and flexibility. However, it also comes with notable drawbacks, especially when shareholders are foreign entities. Ultimately, investors must carefully weigh these advantages and disadvantages when choosing the best financing method.

Additional Contributions to the Company

Additional contributions are an attractive and flexible method of financing companies, offering several advantages over traditional funding options. This financing approach allows shareholders to support the company with cash payments beyond their initial share, without the need for complex procedures or agreements. Additional contributions are cash amounts that shareholders are required to pay to the company in addition to their share.

The company is obligated to return these contributions once the reasons for collecting them no longer apply. Additional contributions can be used for various purposes, such as repaying debts or acquiring operating resources. The amount of the additional contribution is proportional to each shareholder's share in the company, unless otherwise specified in the founding act or decision of the assembly.

The advantages of this financing method primarily lie in the fact that, even when the shareholders are foreign entities, no procedure before the National Bank of Serbia is required. Furthermore, there is no need to prepare an agreement between the shareholder and the company; the obligation to make additional contributions is solely provided for in the founding act or (usually unanimous) decision of the assembly. The founding act may specify that decisions on additional contributions do not require unanimity and can be made by a majority vote. In this case, the decision only binds the shareholders who voted in favor, meaning the shareholder agrees to the obligation without the need for an agreement.

The founding act or assembly decision must specify the deadline for returning additional contributions to shareholders. These contributions must be repaid in accordance with the rules for reducing the registered share capital. This requirement could be viewed as a disadvantage compared to financing the company through a loan.

A member can only claim the return of the additional contribution if they have fully paid it and have also paid-in/entered their full share in the company. However, if a member has paid the full additional contribution but has not paid-in/entered the full share, they can request that the company offset the return of the additional contribution by the amount of the unpaid share.

The company cannot return the contributions in a way that jeopardizes its solvency. If the company enters bankruptcy, shareholders’ claims for additional contributions are settled only after all creditors are fully paid, as well as after settling any claims for loans provided to the company by shareholders. In any case, if the additional contribution is not returned, the shareholder has the right to file a lawsuit to “recover” the amount.

Final note

In conclusion, loans come with many complexities due to tax and foreign exchange regulations. These complexities can make loans less attractive than additional contributions to the company. However, with additional contributions, it is important to consider the more challenging repayment process, given that the rules for reducing registered share capital apply, and the repayment of additional contributions can be jeopardized in the event of company’s insolvency.

Authors: Miloš Vučković, Managing partner at IVVK Lawyers and Katarina Marković, Associate in cooparation with IVVK Lawyers

For more information please contact us at office@lexquire-ivvk.rs