As the year 2023 has unnoticeably come to an end, it’s the final time to look over the financial position of your company. It doesn’t matter if you just recently established your company in Sweden or have been doing business for years now, there are some main rules to follow. One of the most important rules associated with the company is regarding its net assets. So, let’s have a more detailed look at this and the best measures to take if the value of your net assets is not meeting the requirements dictated by the law.
The most important rule to follow
The law states that by the end of the financial year, net assets of a private limited company in Sweden must amount to at least half of the value of its share capital and the minimum share capital in Sweden is 25 000 SEK.
This means that if you have put in the minimum share capital of 25 000 SEK, your company’s minimum net assets value must be at least 12 500 SEK by the end of the year. If you have put in bigger share capital than 25 000 SEK, let’s say 50 000 SEK, then your company’s net assets must be at least 25 000 SEK.
Before diving into the topic in more detail, let’s also have a look at what net assets exactly means. Net assets (also called equity capital or net assets value) is one of your company’s financial position indicators and is made of your company’s share capital, profit or loss, and reserves.
What happens to the financial position of company if it doesn’t have the minimum amount of net assets?
If the net assets value does not meet the rules we previously mentioned, the owners are required to take some measures. If these measures are not taken, the government will start compulsory liquidation.
There’s also an option to still keep the business going, but this can only happen on the full responsibility of the board members. Meaning that the board member or board members will be personally responsible for all the debts of the company and have to cover the obligations from their private assets if needed. This is something that is legally valid, but strictly not recommended as being personally responsible can be very tricky.
The company’s board has the responsibility to observe the financial status of the company on an ongoing basis and not only at the end of the year. Therefore, if any net assets problems arise, it’s reasonable to start looking for solutions right away because the end of the year is a very busy time for all the accountants and lawyers and it can happen that they won’t be able to solve everything in time.
What measures to take if the company has less net assets than required by the law?
Fortunately, there are several options for the owners if the net assets value is not meeting the requirements. It’s important that explanations about which option the owners will use to restore the net assets must be submitted together with the annual report.
Now, let’s look into some of the most common measures:
1. Preparation of the interim balance sheet
With this option, the company will end the year with negative net assets, but it is suitable if it’s foreseen that the financial results of the company will be very good next year and will raise the net assets value to an acceptable level. The net assets must be restored within the eight months after the end of the previous financial year. If that can’t be done, the owners must make a contribution to the net assets or start the compulsory liquidation.
So, if better results are not expected from the new year, it is recommended to use any other options to restore the net assets value and not to end the year in negative equity. In case you decide to go with this option and need help in compiling the interim balance sheet, feel free to contact our accountants.
2. Conditional contribution to the equity capital
This is one of the most popular measures and is suitable if help from owners is necessary and additional monetary or non-monetary contributions are needed.
With the conditional contribution the money contributed to the equity can be paid back to the owner. Money can be paid back only if this is decided at the shareholders’ meeting and if there are enough free resources in the equity capital. Repayment can be done as soon as it is possible for the company and it must definitely be done before taking out any dividends from the company.
It’s important to know that with conditional contribution, a protocol must be compiled and stored in the company documents. If you need any help with the protocol, our professional lawyers can happily help you.
Subordinated loan is one form of non-monetary conditional contribution. Owners’ loan to the company will be temporarily shifted in the balance from debt to equity. This means that interest calculation on the amount is not allowed as long as the amount remains in the company as a conditional contribution.
3. Unconditional contribution to the equity capital
Like with conditional contribution, this option is suitable if help from owners is necessary and additional monetary or non-monetary contributions are needed.
The difference between conditional and unconditional contributions consists in the fact that with the conditional contribution the money contributed to the equity can be paid back to the owner. With an unconditional contribution, there is no way to get money back from the company as it is not considered as a loan. The contribution can only be retrieved if the company is liquidated.
With both of the contributions, a protocol must be compiled and stored in the company documents. If you need any help with the protocol, our professional lawyers can happily help you.
4. Withdrawal of the claim
Can be used if someone, usually the owner, has given a loan to the company and decides to withdraw the claim. If that happens, the obligations of the company decrease, and the profit, i.e. net assets increases. This option is however not recommended as it is not possible to get the money back and if the owner is a company, this option can also bring some tax obligations with it.
5. Continuing activities on the full responsibility of the board members
As already mentioned that it is not very recommended, it is still possible to continue business activities with the company on the full responsibility of the board members. Meaning that the board member or board members will be personally responsible for all the debts of the company and have to cover the obligations from their private assets if needed.
6. Increasing the share capital / issuing new shares
It is also an option to increase the share capital of the company and issue new shares. This can be done for the existing owners or by involving some new investors.
The best option for your company depends on many factors and should be looked into by professionals. Also, some of the options result in legal and/or tax consequences, therefore, please contact your accountant or order a consultation before making payments or changes to your company.
Keeping your company’s financial position in order is one of the most important things in doing business. If you have run into some problems regarding equity, don’t worry, as there are enough options and measures to get everything back in line.
Of course, if you are not that familiar with all the legal and tax processes, it can be a bit overwhelming. Therefore, 1Office’s professional lawyers and tax consultants are more than happy to offer you a consultation or even carry out these processes on your behalf. Just contact us for further information.