The reasons for reducing the capital of a sole-owner limited liability company (EOOD) or a limited liability company (OOD) may vary. Capital is a fundamental component of the company, subject to entry in the Commercial Register, and it determines the minimum assets available to the company. The company is required to hold assets corresponding to the registered capital. If the assets fall below this value — for example, following a sale of property or losses — it becomes necessary to reduce the capital. An example of this is where property contributed in kind to the capital is sold. A reduction of capital may also become necessary owing to the withdrawal or death of a partner.
The reduction of capital is a complex process that has legal as well as accounting and tax consequences for the company. Because of this complexity, it is advisable to consult an attorney and an accountant in order to avoid potential risks.
Methods of Reducing the Capital of an EOOD and an OOD
There are several methods by which the capital of an EOOD or OOD may be reduced:
- Reducing the value of the company shares
Every company has capital divided into shares, each with a specific value. A reduction of capital may be achieved by reducing the value of these shares. It must be emphasised that the law does not allow the capital to fall below the minimum amount of BGN 2. For example, if the capital of an OOD is BGN 500, consisting of 5 shares of BGN 100 each, and the decision is to reduce the capital to BGN 250, then the value of each share must be reduced to BGN 50. - Repayment of the capital share of a departing partner
Upon termination of a partner’s participation (e.g. by withdrawal or death), where it is not possible to replace the partner with a new one or an heir, the partner’s shares in the capital must be paid out. In the event that the remaining partners do not distribute these shares among themselves, the company’s capital must be reduced. This method does not apply to an EOOD, since upon termination of the sole owner’s participation the company is also dissolved. - Release from the obligation to pay in the unpaid portion of the capital
Upon the incorporation of an EOOD or OOD, the sole owner or the partners must make contributions towards the capital. If these contributions have not been made in full, the law permits release from the obligation to pay in the remainder. In this case, the capital is reduced to the amount actually paid in.
Procedure for Reducing the Capital
- Adopting a decision to reduce the capital
The reduction of capital begins with a decision adopted by the sole owner or the general meeting of the partners. The decision must be recorded in minutes and notarised (where this is provided for in the instrument of incorporation or the articles of association). The decision must clearly state the amount and purpose of the reduction — whether it is to cover losses, the withdrawal of a partner, and so on. - Amending the Instrument of Incorporation and the Articles of Association
Since the capital and the shares form part of the company’s constitutive documents, a decision to amend them must be adopted. - Announcing the reduction in the Commercial Register
This action is carried out in order to notify the company’s creditors. They have the right to object if they consider that the reduction of capital harms their interests. Creditors have a three-month period within which they may express their disagreement. - Entry in the Commercial Register
After the expiry of the three-month period, an application А4 is filed with the Commercial Register, to which all documents are attached, including minutes and amendments to the instruments of incorporation. The manager must also declare that there are no dissenting creditors or that their receivables are secured.
Tax and Accounting Aspects of the Reduction of Capital
The company’s capital is assessed on the basis of an interim balance sheet, drawn up as at the end of the month in which the reduction is carried out. If the value of the assets is lower than the liabilities, the departing partner may not receive any payment for their share. The balance sheet has no binding evidentiary value before the court and may be challenged by means of a judicial-economic expert report.
Should you require further information, assistance or consultation regarding the reduction of the capital of an OOD or EOOD, please contact us on tel.: 0887550706 or by e-mail: [email protected]
