Charter capital

Charter capital is the nominal capital, which is the company's capital base. In addition, it sets limits of liability and determines the participation of its participants in relation to creditors or their participation in the company. As mentioned above:

• the company's share capital determines the minimum amount of the company's real estate, which is the nominal value of the company's shares.
• The share capital cannot exceed the actual value of the company's assets.

In this case, art. 99 clause 4 kc obliges the company to reduce the share capital or increase its actual value. If a company cannot increase its actual value or reduce its nominal capital due to minimum capital requirements, it is liquidated. This is monitored through the company's annual reports to the tax authorities when the value of the company's assets and share capital is compared. The amount of share capital is determined by the company's founders and is divided into equal nominal shares.

The minimum capital requirements for charter

The federal law on joint-stock companies specifies the minimum amount of share capital. The minimum capital requirements for charter are different for public and non-public limited companies. The initial capital is created from the contributions of the company's founders, which can be transferred in the form of cash or type contributions. All proposed changes in the amount of share capital are subject to the decision of the general meeting. The amount of share capital should also serve as a minimum guarantee for creditors. However, due to the relatively low minimum requirements for charter capital, a situation arises in which the claims of creditors cannot be sufficiently satisfied using charter capital. Thus, as a rule, the minimum charter capital requirements only serve as a barrier to unnecessary company setting ambitions, while this sum is not a basis for satisfying creditors' claims.

Reduction of the company's share capital is allowed after notifying all creditors in accordance with the procedure specified in the statute of joint-stock companies. In this case, the company's creditors have the right to demand early termination or fulfillment of appropriate obligations and compensation for damages. The reduction of the share capital of a joint-stock company through the purchase and redemption of part of the shares is permissible if such a possibility is provided for in the company's statute. Charter capital may be expressed as an equivalent in any currency that is lawful at the time shareholders make initial contributions.

Examples of Charter capital

• Equity capital: Equity capital is the money that is used to finance the business operations and activities. It can be raised through the sale of shares to investors or through borrowing from external investors. It is the most important element of a company's charter capital.
• Preference capital: Preference capital is a type of capital that is used to finance long-term investment projects. It is typically issued in the form of bonds or other debt instruments. Preference capital typically has a higher interest rate than equity capital and is not convertible into equity.
• Retained earnings: Retained earnings are the profits of a company that are kept as a part of the company's charter capital. These are not distributed as dividends to shareholders, but instead are reinvested into the company.
• Capital reserve: A capital reserve is a type of capital that is held within the company's charter capital. It can be used to finance long-term investments or to pay for large expenses. Capital reserves are not typically used to pay out dividends, but rather to fund future growth.

Advantages of Charter capital

Charter capital has many advantages for a company. These include:

• Increased protection for creditors: Charter capital sets limits of liability for the company's participants, which helps to protect creditors from losses in the event of a company's insolvency.
• Improved flexibility in capital structure: Charter capital allows companies to tailor their capital structure to their specific business needs and goals.
• Increased assurance of accuracy: The charter capital also helps to ensure that the company's capital structure is accurately represented in the company's financial statements.
• Enhanced ownership control: The participation of the participants in the company is determined by the charter capital, which allows them to maintain greater control over their ownership interests.
• Improved ability to raise capital: Companies can use charter capital to facilitate the raising of capital from external sources. This helps the company to access a larger pool of investments and capital.

Limitations of Charter capital

Charter capital is the nominal capital, which is the company's Capital Base. It sets several limitations, which include:

• Liability: It sets limits of liability for the participants of the company in relation to creditors or their participation in the company.
• Ownership: It also determines the ownership structure of the company, and the total amount of ownership and participation of the different shareholders.
• Capital Increase: Charter capital also limits the amount of capital that can be raised by the company.
• Distribution of Profits: It also determines the distribution of profits among the shareholders of the company.
• Capital Reduction: Charter capital also defines the conditions under which the company can reduce its capital.

Other approaches related to Charter capital

• Charter capital can also be used to determine the size of the company's equity.
• It may also be used to determine the amount of dividends or other benefits that shareholders are entitled to receive.
• Additionally, charter capital can be used to set the terms of the company's debt financing.
• Furthermore, charter capital can be used to set the size of the company's board of directors and the number of board members.

In conclusion, charter capital is used to determine the size of the company's equity, the amount of dividends or other benefits that shareholders are entitled to receive, the terms of the company's debt financing, and the size of the company's board of directors and the number of board members.

Charter capital — recommended articles

Limited partnership — Assets funding strategy — General reserve — Debenture Redemption Reserve — Shareholder loan — Redeemable shares — Issued share capital — Credit Facility — Contributed Surplus

References

• Heindler F., (2018), Corporate and Unitary Legal Entities in Russia, Kluwer Law  International, The Netherlands
• Kosovo Business Law Handbook: Strategic Information and Laws, (2013), Kosovo Business Law Handbook: Strategic Information and Laws, International Business Publications, United States
• Maggs P. B., (1997), The Civil Code of the Russian Federation: Parts 1 and 2, M. E. Sharpe, Inc., United States
• Sharpe M. E., (1992), Statutes & Decisions: The Laws of the USSR and Its Successor States, Incorporated,  United States

Footnotes

Author: Weronika Nowak