Why is equity so important?

Components of equity:

• Subscribed capital
• Legal reserve
• Other reserves
• The profit / loss of the company from the previous financial years

Subscribed capital

When I create a company, the shareholders bring in subscribed capital. If I put a very small share capital, let's say the minimum of 200 lei, I invest in the company only 200 lei. If, however, I set up the company with a solid subscribed capital, if I bring equipment, goods, what I need to carry out the object of activity - this means that I give life from the beginning to the company and it starts solid, it may begin already the activity - and it does not stand and struggle by going to the banks, knocking on their doors to apply for loans.

If I subscribe capital and start buying, it is even better, because if my business is already a VAT payer, I save 19% of the value of the subscribed capital. This percentage represents the value of the VAT I can deduct.

Legal reserve

What does the legal reserve mean? It gives me the possibility, according to the Tax Code, to deduct 20% of the subscribed capital when calculating the profit tax, if my business is a profit tax payer. For instance, if I have a profit of 100,000 lei, then, when calculating the profit tax, I do not apply it for 20% of the 100,000 lei. These 20,000 lei cannot be withdrawn as dividends; they will remain available to the company as a legal reserve - but I can use them at any time for investment.

Other reserves

The most important component of equity capitals: other reserves. We will discuss separately.

Profit / loss from previous years

My company starts producing, it makes profit. Let’s suppose that in the first quarter of the year I made a profit of 200,000 lei. Instead of leaving it in the company, to grow further, I choose to remove the profit, because now the law gives me the possibility to withdraw interim dividends - and I take all the profit as dividends, transferring them to my personal account. What's going on right now? The phenomenon is as follows: the company will no longer have cash, it will not be able to operate - and will start scraping.

Many shareholders, month after month, take money and leave them, from the accounting point of view, in the petty cash account - while consuming it in their personal interest. What do you think happens with this company, from which shareholders take out money whenever they need? At one point they have nothing with what to finance their activity. What is the result? Simply insolvency. Or trips to the banks to get loans. The bank, when analysing the credit file, discovers in fact that the profit is in the petty cash account, that they took it and used it for their personal interest. It will not give the loan because these shareholders cannot prove that this company respects the principle of continuity and works further. And then they have a choice: either return the money that they personally borrow from various sources and they bring money in the company, and the company comes to life again, or they simply resign and say "this is it, we were only able to take it do this level". This means they have not created from the beginning a solid company that can operate further.

So, any profit I make and leave in the company is actually the life of the company, allowing it to carry on. I can start withdrawing money from the company after a year - two, after I have already created its structure, equipment, I already have everything functional and set up, only then can I tart thinking about dividends. I must not take the profit from the company as soon as I have realised it, for luxury cars, houses, holidays. That is not a company I create for the future, but it is for short term.