The obligation to constitute a legal reserve is provided for by the Commercial Code and applies to the following companies: In this context, Article 229 LGS provides for the obligation that at least ten percent (10%) of the distributable profit of each year, less income tax, be allocated to a statutory reserve: Until it reaches an amount equal to one fifth of the capital (i.e. up to 20% of the capital), and adds that in the event of an overload of the reserve, it does not have the condition of a legal reserve. The company may take this surplus and establish or increase a statutory or occasional reserve or distribute it as a dividend to shareholders. The legal reserve is a fund for the protection of a company that helps it deal with contingencies that may arise; For example, to compensate for losses. Therefore, the legal and financial details of this important corporate obligation will be discussed below. It is important to note that if the legal reserve is distributed for purposes other than capitalization, the director may repeat to shareholders the value of what is given to them, and the partners may, on their own initiative, stipulate in the articles of association the constitution of reserves, with or without specific provision. This inclusion in the articles of association becomes an obligation for the partners. These are called statutory reserves. Now make the calculation of the legal reserve for the period 2019 based on the data presented below: It should be noted that the law only requires that the reserve be created up to the equivalent of 50% of the share capital, and then, once the amount is completed, it will no longer be mandatory to continue building up reserves, and if this minimum amount has been exceeded, the company is free to dispose of this surplus. There is an important point to consider in the calculation, and Article 36 of the Commercial Code stipulates that it must be the net profit of each year. The term reserves refers to profits or retained earnings of any kind that are excluded from distribution and are used for specific future purposes, thereby giving the enterprise greater economic and financial soundness. `The losses shall be offset by the reserves set aside for that purpose and, failing that, by the statutory reserve. Reserves intended to absorb certain losses may not be used to cover other losses unless the assembly so decides.
In the following text you will find everything you need to know about the legal reserve, what percentage they are formed, how the value of each individual reservation is determined, what maximum limit they must comply with and to what extent they can be used. In the first case, the profit is net, since all related expenses, including income tax, have been deducted. In the second case, the ISR has not yet been determined. The tax is set as a percentage of 25% on the profit, for this example the ESR is 87.50. Net profit for the year was 262.50. In this case, since the amount of $28,715.00 is required to complete the legal reserve of 20% of the share capital. As for the accounting of the legal reserve, it is part of the inheritance, more precisely in the 330505 account according to the Colombian uniform chart of accounts. This legal reserve is mandatory for every company, as it will not only be able to bear possible damages, but will also have to face mandatory payments, sparing these companies legal problems. The shareholders of Los Patitos, S.A. make a profit distribution that was not caused by a preliminary balance sheet as at June 30. The profit is equal to 100.00, which is distributed in 50% of each partner.
The legal reserve may be capitalized annually up to the excess of five percent (5%) if the annual legal reserve exceeds fifteen percent (15 percent) of the paid-up capital at the end of the preceding fiscal year. Therefore, the legal reserve consists of 10%, which the company accumulates from the accounting profits it has, for example, only the net assets that the company earned from the last liquidated year is taken. The statutory reserve is calculated on the basis of the net profit of the year, understood as net profit after tax and, of course, after deduction or reduction of all costs and expenses of the normal year of the company It should be noted that if the shareholders` meeting decides to distribute dividends on cumulative profits of $1,195,830.00, and in the event that the beneficiary partners or shareholders are natural persons, the company must withhold 10% SRI from the amount of the dividend received from each person (Article 140, second paragraph, LISR). For example, if the share capital of the corporation is $100,000,000 and the legal reserve has accumulated $70,000,000, it means that the corporation has a legal reserve $20,000,000 higher than required by law, so you can take that $20,000,000 and give it the use intended by the meeting. The legal reserve in Guatemala is contained in the Commercial Code and applies only to any type of business, that is, if you have only one company, a co-owned company, this legal reserve is not applicable. As mentioned above, having a loss or negative result does not necessarily imply the obligation to offset it, but in the case of sufficient voluntary or optional reserves to compensate for the loss for the period, it would be strongly advised to proceed with compensation (to cover losses) and to clean up equity from the proven negative result. HOW AND WHEN DO I REGISTER? Although the provisions do not exhaustively specify when these reserves are to be determined and recorded, they occur at the end of each fiscal year in which the net of tax profit is generated. The LLC that has already agreed on the established legal booking commitment can do so at the beginning of the new cycle or period as it does not have a meeting.
Public limited companies, on the other hand, may do so at the time when the meeting so decides. The accounting is carried out as follows: debit of the “Annual surplus” account with credit to the “Legal reserve” account. The legal reserve is an account with a balance that, together with the other reserves and results, forms part of the company`s assets. In this case, income tax on profit is determined without deduction of the reserve, and once income tax is determined, it is deducted to determine the liquid profit on which the legal reserve is calculated. The legal reserve has a specific provision provided for by law, but this limitation is based solely on the value or amount required by law, and not on its surplus, so that the company can use the purpose it wishes for this surplus. The amount exceeding this limit does not have the status of legal reserve. Similarly, for the creation of this account, there is an obligation to allocate to it at least ten percent of the distributable profit of each year less income tax. In summary, it is possible to offset the losses of the year with voluntary reserves, and it is advisable to do so in order to project a better picture of the company`s assets, since this is the appropriate time to make the compensation before the end of the year. If the company does not generate profits in a year or year, it is not obliged to allocate funds to the legal reserve, because this legally required 10% is attributable to liquid profits and these cannot exist in case of losses. Since the profit for the year is creditable, it is debited when the funds are withdrawn in order to transfer them to the reserve account, which is also creditable. It is the difference between comparing income with the expenses of the year, being able to present two variables: a favorable balance and therefore a profit, a profit or a profit; or an unfavorable balance and therefore a disadvantage, a loss.
I appreciate all the information on this page, it has been very helpful for my academic work. The net profit mentioned here is the profit determined in the accounts, which differs significantly from the tax profit or the annual profit of the company. It should also be added that since the legal reserves as at 31.12.2017 (S/ 00) do not exceed 20% of the share capital (S / 2,000,000 x 20% = S / 400,000), the deduction is made for the amount calculated in the previous table: Assuming that a given company earned a total of $10,000 net in the last year, This annual amount is deducted from 10% of this sum, which is transferred to the reserve, since it is calculated that this percentage can cover any negative figures that this company may have the following year. The percentage and amount of the legal reserve are determined by the Commercial Code for each form of company. HOW IT IS CALCULATED: When calculating the legal reserve of commercial companies, the annual profit minus the annual tax should be taken as a basis. The reserve requirement ratio is 5%. The minimum amount of the statutory reserve account must be 20% of the subscribed share capital. Once this amount is reached, there is no need to increase the fund further, that is, it will not be necessary to charge it more. If no profit is made, the legal reserve does not have to be calculated. This reservation may not contain any provision other than that established by law, which stipulates that it will be used to eliminate losses.