Business equity

Verified 22 November 2022 - Directorate for Legal and Administrative Information (Prime Minister)

The equity they correspond to the business' resources as a whole and reflect its financial value. These are the funds contributed by members or shareholders when the business is created, plus funds generated by its activity.

Equity is used to to finance the activity, in particular at the start of the company where there is still insufficient cash flow.

In addition, equity serves as a guarantee against third parties (suppliers, investors, banks) and their stability allows d'establish legitimacy business. They reflect the company’s creditworthiness and its capacity to service its debts. Therefore, they are used to calculate the borrowing capacity of the business.

Finally, positive equity can be distributed in part to members or shareholders as dividends.

Equity includes funds contributed by members or shareholders when creating the business and funds generated in the various financial years.

Thus, equity is composed of next items :

  • Share capital
  • Reserves
  • Carry-overs
  • Issuance premiums
  • Investment grants
  • Outturn for the financial year (profit or loss)
  • Regulated provisions

Warning  

Do not confuse equity and equity. The concept of own funds is a broader concept which includes equity and other items known as ‘other equity’ (e.g. conditioned advances).

Share capital

The share capital corresponds to all the contributions made during the creation business by shareholders or members.

In the course of social life, social capital may be subject to increase (either by new contributions or by incorporation of reserves) or by reduction (in the event of losses or resumption of contributions).

Warning  

Where the amount of equity becomes less than half of the share capital, the business shall implement a specific procedure.

Reserves

Reserves are retained earnings, kept at the disposal of the business and assigned to destinations determined by the general meeting of the shareholders. In particular, the reserves help to strengthen the financial situation of the business.

Please note

Reservations should not be confused with provisions which correspond to loads.

There are different types of reserves:

  • Legal reserve : this is a reserve obligatory provided for by law. It shall consist of a levy of at least 5% realized on the profit of each financial year. This levy ceases to be compulsory when the legal reserve reaches 10% social capital. This reserve cannot be distributed.
  • Statutory reserves : these are reserves prescribed by the statutes business. At the general meeting at which the annual accounts are closed, the general body responsible for distributing the profits must put them in reserve. Because of its binding nature, the constitution of such reserves is rarely provided for in the Statute.
  • Optional reservations : after allocation to the statutory reserve and, where appropriate, to the statutory reserve, the statutes often grant the ordinary general meeting the right to deduct sums from the profits of the financial year for a specific purpose. These sums may be used for the discharge of losses, the distribution to members by decision of the meeting, the increase of the share capital (by incorporation of reserves) or the redemption of shares or shares.

FYI  

With 50 employees or more, the business must implement a special reserve for participation. This reserve is a system of wage savings which allows employees to participate in the profits of the business.

Carry Forward Again

At the end of the financial year, members have six months to approve business accounts and decide on the allocation of any profits (e.g. dividend distribution or set aside).

Carry-forward allows partners to to defer the allocation of all or part of the profits next fiscal year. In other words, the business may decide to to set aside profits to guard against future losses. Another positive carry-over is a sign of prudent management.

Example :

A business earns a profit of €100,000. It may decide to put in reserve €5,000 (5% under the legal reserve), to distribute €55,000 to its partners in the form of dividends and to allocate €40,000 remaining to be carried forward again.

Issuance premiums

The issue premium is akin to a admission fee paid by new members (or shareholders) in connection with a capital increase.

On the day of a capital increase, business is normally better value only when it was created. Therefore, the real value of its securities (their value on the day of the capital increase) is greater than their nominal value (their initial value when the business was created).

It would appear ‘unfair’ for a new partner to be able to enter the capital at that time, by contributing an amount similar to what was contributed at the time of incorporation, when the value of the business has changed.

Thus, the issue premium allows the real value of the business to be taken into account on the day the new securities are issued. She's coming to compensate for this difference to put the new and older associates on an equal footing.

Please note

The issue premium is not not obligatory, this is an additional supplement left to the business. It may be distributed to shareholders or members.

Its amount is calculated from the following formula: (Real value - nominal value) x Number of securities = Issuance premium.

Example :

In 2020, 2 partners set up a SARL. The share capital of €1,000 is divided into 10 shares of €100 each (nominal value).

In 2022, the business is implementing a capital increase creating 6 new shares that a new partner wants to buy. To acquire the 6 shares, this investor must contribute to the business 6 × €100 (nominal value of the share) or €600.

However, in two years of activity, the business' shares have increased in value. Today, their real value is estimated at €150 each.

The former partners decide to match the capital increase with a issue premium equivalent to the difference between the nominal value of the shares and their real value. The emission premium is therefore (150-100) × 6 = €300.

In the end, to buy the 6 shares, the new partner must bring €600 in respect of the nominal value of the shares and €300 under the issue premium, or €900 in total.

In order to calculate the amount of the issue premium, it is essential that thevaluation of the business.

Investment grant

The investment grant is a financial support for the business by a private or public institution (usually a local authority). It is used to support activity over the long term or to finance investments such as the purchase of equipment or a vehicle (e.g. the ecological bonus).

The investment grant is awarded on a final basis, the business has no obligation to pay it back.

Please note

Not to be confused with the operating grant which is used to finance operating expenses. These are the expenses incurred by the business to operate and thus achieve its turnover (rent, water and electricity, purchase of goods, insurance, taxes, etc.).

In accounting, the investment grant is included in the accounting result at the same rate as depreciation of the good she financed.

Example :

A business obtains an investment grant to finance the purchase of computer hardware amortized on 10 years. In each exercise, it must be integrated into a product 10% the grant received in its profit or loss account.

To obtain a grant, the business must complete a grant application dossier with the local authority. The application shall contain the following documents:

  • Overview of the company
  • Presentation of the investment project
  • Investment financing plan
  • Forecast balance sheet

Consult state and local government aid

Outturn for the financial year

The result of the financial year shall be consequence of activity business.

It matches the change in equity between the beginning and end of the accounting year. In other words, the accounting income in a year is the business’s turnover (what it has received) less all the expenses associated with its activity (what it has received).

The result of the business year can be expressed in two ways:

  • By a profit, the business made money (increased equity)
  • By a loss, business lost money (lower equity)

The profit or loss for the financial year shall appear in the profit or loss account.

Example :

A SARL at the share capital of €5,000 records a loss of €9,000 during its accounting year.

Moreover, its reserves amount to €3,000, the postponement again to €2,000 and regulated provisions at €1,000.

Thus, the amount of equity is (5 000 + 3 000 + 2 000 + 1 000) - 9 000 = €2,000.

Here, the equity becomes less than half of the share capital (€2,500) which triggers a specific procedure.

Regulated provisions

Conventionally, a provision is an accounting statement of probable risk. Its function is to anticipate a future burden on the company, the amount of which is not yet definitively known.

One regulated provision is accounted for, not because it arises from a risk, but because it corresponds to tax provisions.

The various regulated provisions are as follows:

  • Provision for price increase : during a increase in raw material prices or goods of more than 10% over one or two successive years, the provision allows the company to reduce its taxable profit to take into account this financial surplus and thus facilitate the financing of stocks.
  • Provision relating toderogating depreciation —It enablesdepreciate more the fixed assets in the first few years of use, this encourages companies to invest more.
  • Provision for investments : businesses that have established a profit sharing for their employees can provision the part exceeding the legal limit. The provision allows the purchase of a fixed asset within one year of the end of the relevant accounting year.

Regulated provisions are set out in indebted the balance sheet under the heading of equity. They are considered unpaid reserves. This means that when the business restarts provisions, it will increase its profit by a certain amount, which will then be taxable.

FYI  

The business’s allocations to regulated provisions are exceptional allocations which make it possible to reduce accounting profit or loss, so the level ofbusiness tax.

Equity shall be included in the indebted the accounting balance sheet (right-hand column) because they constitute a debt owed to members or shareholders business.

In the General Chart of Accounts (GAAP), equity is the accounts 10 to 14 :

  • Share capital (account 101)
  • Issuance premiums (account 104)
  • Reserves (account 106)
  • Carry-over again (accounts 110 and 119)
  • The results of the financial year (accounts 120 to 129)
  • Investment grants (accounts 131, 138 and 139)
  • Regulated provisions (accounts 142 to 148)

Who can help me?

Find who can answer your questions in your region