Charter capital is the sum of funds and/or property that founders (participants) transfer to an LLC (hereinafter referred to as “company”) when it is set up and during its existence.
Charter capital is the nominal value of the participants’ shares, expressed in hryvnias.
Notably, the law does not set a minimum threshold for the amount of charter capital for limited liability companies (unlike for joint stock companies), so its value is determined by the founders.
The formation of charter capital refers to the process in which participants make their contributions in the prescribed manner and amount. As a result, a declared charter capital is backed by property and/or funds. Charter capital is considered fully formed only when all participants have paid for their shares in full.
Ukrainian law requires that each participant makes their full contribution within six months from the company’s registration date unless the company’s charter states otherwise. This period can be shortened or extended by a unanimous decision of a general meeting attended by all participants.
If declared charter capital is not fully paid within a prescribed period, an unpaid portion remains unformed, and the company, along with a general meeting, shall take the necessary steps as outlined by the law to address the situation.
What are the ways to form charter capital?
Charter capital can be formed in various ways depending on the type of contribution. The law allows participants to contribute both money and property, giving participants a wide range of options.
Both individuals and legal entities, whether based in Ukraine or abroad, can participate in charter capital formation. The procedure for contributing may differ for each category of participant.
Monetary contributions
Contributing money to charter capital is the most common method of forming it.
An individual may contribute by paying cash at a bank branch or by transferring funds directly into the company’s account. A legal entity, on the other hand, should contribute exclusively via bank transfer, transferring money from its account to the company’s account.
In both cases, the payment’s purpose specified in payment instructions is a contribution to the company’s charter capital, and a bank certificate (receipt) serves as a confirmation of the payment.
Foreign investors (both individuals and legal entities) can also make monetary contributions. In such cases, foreign participants transfer funds in foreign currency, which are converted into hryvnias and credited to charter capital.
However, this procedure is more complex due to currency regulations and the need for documents proving a source of the funds.
Financial monitoring at the bank where the company’s account is held will require the provision of documents that justify crediting funds to the account. Under normal circumstances, minutes of general meeting (or resolution of sole founder participant (participant), in the case of a sole founder) will suffice to resolve this issue. However, additional documentation and clarification may be required in some cases.
The next point to consider regarding contributions from non-residents is a difference in amounts due to the conversion of the contribution from foreign currency to hryvnias.
Even though the minutes of the general meeting (or resolution of sole founder participant (participant)) specify an amount of charter capital both in foreign currency and in hryvnias as of the general meeting date, the amount converted at a later date may differ. This could result in a credited amount exceeding the original sum mentioned in the minutes. This technical discrepancy may cause issues when crediting funds to the company’s bank account.
For this reason, it is advisable to agree with the bank in advance to handle any discrepancy and avoid refunds to foreign investors.
Property contributions
In addition to money, participants can form charter capital by contributing property or property rights. The law clearly states that contributions can include not only cash but also securities and other property with monetary value.
Contributing property to charter capital is a convenient option, especially when there is a tight deadline for full payment of a share by a participant. For example, this may be used when a participant wishes to sell or transfer part of their share to another investor in an already established company.
If a newly created company has a large ownership structure, then its verification by the bank’s financial monitoring service, providing the bank with additional information and explanations in a short time may become technically impossible, and opening an account, respectively, also.
In such cases, contributing property is an effective way to fulfil the participant’s obligation to pay for their share.
Contributions can include securities, movable or immovable property (e.g., equipment, vehicles, real estate), intellectual property rights, corporate rights in another legal entity, etc.
Establishing the value of property in hryvnias is essential for non-cash contributions. The valuation of a property contribution should be approved by a unanimous decision of a general meeting attended by all participants or, in the case of company formation, by the founders’ decision.
That is, participants jointly agree on the value of property being transferred to credit this amount towards payment of their shares.
Property contributions involve transferring ownership of an asset to the company, and the procedure differs depending on the type of asset.
Thus, the transfer of securities will require the preliminary opening of a securities account with subsequent crediting of securities to it as a contribution.
For real estate, a contribution requires an agreement between the participant and company, followed by state registration of ownership.
For intellectual property rights (such as software code, trademarks, etc.), an agreement should be executed with the company, specifying the scope, territory, and terms of the rights being transferred, as well as registration changes, if applicable.
Intellectual property contributions are often used when establishing joint ventures, where some founders contribute intellectual property while others contribute money. This arrangement allows businesses to assess the value of intellectual property rights and determine the scope of corporate rights in connection with that contribution.
Transferring corporate rights from another company as a contribution requires signing an agreement, an acceptance and transfer act, state registration of participant change, along with updating ownership structure and beneficial owners.
Importantly, once property is credited, the company acquires ownership of the property, and participants receive corporate rights in proportion to the value of their contribution.
When charter capital is considered unformed, what are the consequences?
Charter capital is considered unformed if, after the deadline for making contributions, participants have not fully paid for their declared shares and part of charter capital remains unbacked by real assets.
In this case, the law requires the company and its participants to take action to resolve the situation, and it outlines the potential consequences for participants.
First, participants who fail to make their contributions on time are jointly and severally liable for the company’s obligations up to an unpaid amount. This provides an additional guarantee for creditors: if a company lacks sufficient assets to pay its debts, creditors may seek payment from participants who have not fully paid their share in charter capital.
Second, the company’s executive body should send a written notice to defaulting participants, informing them about overdue contributions and offering an additional payment period (up to 30 days).
If a contribution is not made within an additional period, the company should convene a general meeting to decide what to do with the unpaid capital. The law provides several options: (1) exclude participants from the company; (2) reduce charter capital by the amount of unpaid contribution; (3) redistribute unpaid shares among other participants (with an additional payment); or (4) liquidate the company.
During the period in which a participant owes company contribution, their votes will not be counted in decisions related to the unpaid share.
Failure to contribute within the prescribed period carries both financial and corporate consequences for a participant, including potential loss of their share or reduction in the charter capital.
Moreover, ensuring the proper formation of charter capital and verifying the fulfilment of contribution obligations is crucial in preventing litigation related to share payments.
For example, in case No. 924/9/21 (resolution of the Supreme Court dated 13 June 2024), a participant who had sold their share attempted to declare the sale and purchase agreement and the share transfer act invalid, claiming their share in charter capital was not fully paid at the time of the sale.
The Supreme Court rejected these claims, noting that the participant’s failure to pay for their share before transferring does not violate their rights. The court found the claimant’s actions to be in bad faith, as they had voluntarily agreed, assuring the buyer that the share was fully paid for, only to later attempt to cancel the agreement due to their own breach.
This case highlights the importance of properly forming charter capital and verifying that participants have fulfilled their contribution obligations to avoid disputes.
Thus, ensuring the proper formation of charter capital is essential both for protecting the financial and corporate rights of participants and for safeguarding the rights of potential future acquirers of shares in charter capital.