Term and legal framework of “Capital”
The term “Capital” plays a central role in numerous areas of law and, in a legal context, primarily refers to the totality of material and immaterial resources that can be deployed for economic purposes. In business and corporate law, capital forms the basis for the financial resources of companies and institutions, while in tax law, civil law, and other legal fields, specific regulations and definitions apply. The legal treatment of capital encompasses aspects of formation, preservation, management, and utilization, as well as the safeguarding of creditors’ and shareholders’ rights.
Capital in Corporate Law
Equity
In corporate law, equity refers to the funds provided by the owners or shareholders of a company. It serves as a basis for liability and reflects the financial stability of a business. The legal requirements for equity capital differ depending on the legal form of the company:
- GmbH: The minimum share capital is 25,000 euros (§ 5 GmbHG). This can be contributed in cash or in kind. Half of the share capital must be paid in upon formation.
- Stock Corporation (AG): The minimum share capital is 50,000 euros (§ 7 AktG) and is divided into shares. It ensures creditor protection and the operation of the company structure.
- Partnerships (GbR, OHG, KG): There is no statutory minimum capital requirement. However, the contributed capital (liability capital) is essential for internal profit distribution and liability.
Debt Capital
Debt capital comprises funds made available by third parties—such as lenders. From a legal perspective, debt capital is protected by the capital maintenance principle, especially in companies with limited liability. Interest and repayment are governed by contractual agreements.
Capital Maintenance Principle
The capital maintenance principle protects the liability capital of corporations for the benefit of creditors and, among other things, prohibits the repayment of equity to shareholders outside controlled procedures (e.g., profit distributions, capital reductions in accordance with §§ 30 ff. GmbHG, §§ 57, 62 AktG).
Capital Measures
Various capital measures are regulated by law:
- Capital increase (e.g., by issuing new shares, §§ 182 ff. AktG)
- Capital reduction (to cover losses or repay contributions, §§ 222 ff. AktG)
- Capital increase from company funds (conversion of reserves into share capital)
All these measures are subject to strict legal requirements, especially with regard to creditor protection and transparency obligations.
Capital in Tax Law
In tax law, assets that are considered capital in a broad sense are often treated differently:
- Investment income within the meaning of income tax law (see § 20 EStG): This includes interest, dividends, capital gains from securities, and other income from the provision of capital.
- Business assets: In corporate tax law, a distinction is made between business and private assets. Capital held as business assets is subject to special valuation and taxation rules (e.g., accounting rules under HGB, EStG, and KStG).
Capital in accounting and financial reporting
The German Commercial Code (HGB) as well as international accounting standards (IFRS, US-GAAP) define capital as the difference between assets and liabilities (= equity). The balance sheet structure must show the capital; legal rules on the raising and maintenance of capital set limits on its design and presentation (§§ 264 ff. HGB).
Protection and Utilization of Capital
Principles of Creditor Protection
Corporate law establishes comprehensive mechanisms to protect liability capital in favor of creditors. These include distribution restrictions, capital maintenance regulations, and strict requirements for capital reductions. These rules ensure that creditors have access to a minimum amount of assets for satisfaction.
Insolvency Law Aspects
In the event of insolvency, the capital of the insolvent company is subject to particularly strict access and assessment criteria. Equity and debt capital are treated differently in rank (§§ 38, 39 InsO). While debt capital is generally serviced with priority, equity holders are usually considered subordinate in insolvency proceedings.
Capital in International Law
In the international context (e.g., corporate law of the European Union, international agreements), there are sometimes different definitions and requirements concerning the capitalization and capital protection of companies. The free movement of capital within the EU facilitates cross-border mobilization and investment of capital, but is still subject to specific regulations, for example regarding minimum capital and reporting requirements (directives on the capitalization of credit institutions and insurers).
Capital and Consumer Protection
Capital also plays a role in consumer law, for instance in investor protection. Capital market regulation laws (e.g. WpHG, KAGB) protect investors from risks resulting from inaccurate information, insufficient creditworthiness, or insolvent providers. This includes prospectus requirements, disclosure obligations, and admission requirements for financial service institutions.
Special Forms of Capital
Hidden reserves and intangible assets
In addition to traditional monetary and tangible capital, intangible assets such as patents, trademark rights, or licenses also count as capital. The legal valuation and accounting of these items are precisely regulated (e.g., § 266 para. 2 HGB, IAS 38).
Capital in Foundations and Cooperatives
Foundation law and cooperative law each contain separate provisions for the establishment, preservation, and management of share capital. In the case of a foundation, the foundation’s assets serve the permanent fulfillment of the foundation’s purpose (§§ 80 ff. BGB, state foundation laws).
Conclusion
From a legal perspective, the term “capital” comprises all assets of monetary value provided to private and institutional legal entities for the purpose of fulfilling economic goals, ensuring liability, and satisfying creditors. The legal framework for capital is characterized by comprehensive protection and transparency rules, ongoing adaptation to economic developments, and differentiated requirements across the various areas of law. The detailed statutory provisions aim above all to ensure the functionality of commerce, investment security, and creditor protection.
Frequently Asked Questions
What legal requirements exist for raising capital when forming a corporation?
Raising capital when forming a corporation, such as a GmbH or AG, is subject to strict statutory regulations, primarily set out in the GmbHG (Limited Liability Companies Act) and the AktG (Stock Corporation Act). Founders must already demonstrate during the incorporation process that the share capital stipulated in the articles of association or the partnership agreement (at least 25,000 euros for a GmbH, at least 50,000 euros for an AG) has actually been paid in or is available. The contribution can be made in cash or in kind, and particularly in the case of contributions in kind, a valuation test and a detailed description and assessment by an independent expert are required. The notary must document the proper payment before the company can be registered in the commercial register. If the statutory requirements are not fully met, registration is to be refused and the company does not come into legal existence, which can have far-reaching legal consequences, such as the personal liability of the founders.
What legal restrictions apply to the use of company capital after incorporation?
After incorporation, the capital raised is primarily intended for the protection of creditors and may not be distributed or withdrawn arbitrarily by the shareholders. Legislation clearly provides that withdrawals are only permitted as express and duly evidenced dividends or as part of a properly resolved capital reduction. So-called hidden profit distributions—such as excessive compensation to shareholders or the return of capital contributions outside statutory conditions—are prohibited and may result in civil and criminal liability. Furthermore, §§ 30, 31 GmbHG and corresponding provisions in the AktG stipulate that the share capital must remain untouched in order to guarantee sufficient assets for third-party creditors at all times.
How is capital treated from a legal perspective in the event of insolvency?
In the event of the insolvency of a corporation, the company’s capital is subject to specific insolvency law provisions. The remaining equity is generally used to satisfy creditors. In particular, § 19 InsO specifies that a company’s over-indebtedness is determined primarily by comparing assets and liabilities, including the share or nominal capital. Any capital shares already distributed or no longer recoverable may not be considered, which can, in extreme cases, lead to delayed insolvency filings and resulting criminal liability for the managing directors. In addition, funds that were illegally withdrawn or distributed may be reclaimed by the insolvency administrator within certain periods in accordance with the provisions on voidable transactions (§§ 129 ff. InsO).
What documentation obligations regarding capital exist in relation to the authorities and courts?
Companies must demonstrate the existence and proper use of capital at various times and for different reasons. Upon incorporation, this is done by submitting deposit receipts and, if applicable, reports on formation in kind to the notary and the registry court. During ongoing business, the commercial and corporate law accounting obligations (§§ 238 ff. HGB) require all capital movements to be transparently and traceably documented. In annual financial statements, capital measures (such as capital increases or reductions), or in insolvency proceedings, registry courts, tax authorities, and insolvency administrators require detailed proof and, if necessary, auditors’ certificates regarding the company’s capital situation.
What liability risks do managing directors face for breaches of capital regulations?
Managing directors bear significant personal responsibility for compliance with capital-related regulations. If they violate statutory requirements—for example, through impermissible repayments of share capital, failure to file for insolvency in the event of capital loss, or inadequate record-keeping—they may be individually liable to the company and its creditors, both in civil law and criminal law (e.g., delayed insolvency filing under § 15a InsO). In addition, managing directors may be liable for damages (§ 43 GmbHG) and may lose their capacity to act as managing directors in the future (disqualification as a managing director pursuant to § 6 para. 2 GmbHG).
What requirements and legal effects does a capital increase have?
A capital increase generally requires a valid shareholder resolution, in the case of AGs with a qualified majority (usually 75%) pursuant to § 182 AktG, in a GmbH pursuant to § 53 GmbHG. The capital increase only takes effect upon registration in the commercial register. New contributions must actually be made and corresponding documentation (reports on formation in kind, deposit receipts) submitted. Upon the capital increase taking effect, the company’s liability capital increases, which can affect creditworthiness, creditor protection mechanisms, and the rights of old and new shareholders to acquire shares. Tax implications must also be considered, for example with respect to income tax or real estate transfer tax liability in the case of contributions in kind.
What role does capital play in the calculation of voting rights and profit distributions?
In corporate law, voting rights and participations are often tied to paid-in capital. In a GmbH, the number of votes a shareholder has is generally determined by his or her share of the share capital (§ 47 GmbHG). The entitlement to a dividend and liquidation proceeds is also generally based on the amount of the capital investment made, unless the articles of association provide otherwise. In an AG, participation in profits and voting rights derive from the number and nominal value of shares held (§§ 12, 53a AktG). Only under certain legal conditions—such as cumulative preference shares or differing articles—can rights deviate from this. Hidden reserves or unpaid capital do not entitle the holder to any shareholder rights.
