What happens when losses eat an LLC’s charter capital?

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From the second year’s close, net assets below capital force a reduction — and freeze dividends. Year 2+ The annual test — net assets below the capital at the end of the second and any later financial year oblige the company to reduce capital to net assets and register it. Creditors A reduction alerts them — thirty days to demand early performance and damages from when they learn of it. Frozen No distributions meanwhile — profit cannot be distributed, or paid, while net assets sit below capital plus reserve fund. Fault Insolvency finds its authors — where unlawful actions of the director, board or a controlling shareholder caused it, they answer subsidiarily. The law watches the balance sheet on a yearly clock: if at the close of the second or any subsequent financial year net assets are worth less than the charter capital, the company must announce a reduction to a size not exceeding net assets and register it — and if within three months it neither reduces nor resolves to liquidate, creditors may call their claims and the registrar may ask a court to liquidate. Creditors learning of any reduction hold a thirty-day window to demand early performance. The same arithmetic gates the owners’ money: no distribution can be decided, and none paid, while net assets are — or would fall — below the capital plus the reserve fund, and a reserve fund the charter creates is fed by at least five per cent of net profit yearly until it reaches its set size. Losses, in short, park the dividends before they threaten the company.

What happens when losses eat an LLC’s charter capital?

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