A capital increase is one of the most important corporate transactions for strengthening a company’s financial structure, especially in SMEs and family businesses.
This operation to increase share capital can be key to improving solvency, financing new projects, balancing losses, or facilitating the entry of new partners. In this article, we explain what a capital increase is, what it is used for, and why it can be decisive for the stability and growth of a company like yours.
What is a capital increase and what is it used for?
Index of contents
A capital increase is a transaction whereby a company increases its share capital, either by issuing new shares, raising the par value of existing shares, or capitalizing reserves. In practice, this means strengthening the company’s financial structure with its own resources, improving its solvency and investment capacity. In accounting terms, a capital increase strengthens the company’s net worth and improves its key financial ratios.
Capital increases are used to finance growth projects, reduce debt, offset losses, or facilitate the entry of new partners or investors. They also make it possible to attract new investors without resorting to bank financing, balancing the structure of own and borrowed funds.
In a family business, this operation is particularly important because it affects both the financial side and the ownership structure and generational control.
In the current context, with greater solvency requirements from financial institutions and a more uncertain economic environment, many SMEs and family businesses consider capital increases to be a key tool for ensuring stability and investment capacity.
When is it advisable to carry out a capital increase?
A capital increase is not always the solution, but it is particularly useful in situations of financial imbalance, financing needs, or corporate restructuring. Deciding when it is advisable to carry out a capital increase depends on the company’s financial situation, growth strategy, and shareholder structure. These are the most common scenarios:
When there is financial imbalance or losses
If net equity falls below 50% of the share capital, the company enters into legal dissolution proceedings. In these cases, a capital increase allows the company to recapitalize, restore balance, and avoid legal risks or the obligation to dissolve. It is also an effective preventive measure when there are recurring losses or cash flow tensions that could compromise the continuity of the business. To bring in new partners or investors.
A capital increase is a natural way to bring in new partners, whether family members or outsiders, who can contribute financing, knowledge, or a network of contacts. In family businesses, this formula is useful for incorporating new generations or attracting strategic partners who can drive professionalization.
However, it must be accompanied by a partnership agreement or family protocol that regulates decision-making, voting rights, and the transfer of shares, avoiding future conflicts. To improve the financial image with banks and suppliers
A company with greater share capital conveys an image of solvency and stability, which can translate into better credit terms, trust from suppliers, or access to public tenders.
In the current context, where financial institutions demand greater guarantees, a company with greater share capital conveys stability and solvency, which makes it easier to negotiate loans, renew policies, or access public tenders.
Types of capital increases
There are several types of capital increases, depending on the nature of the contributions, the legal form of the company, or the number of transactions carried out.
Depending on the type of contribution
- Cash contributions: members contribute cash to increase capital. This is the most common formula.
- Non-cash contributions: assets or rights (real estate, vehicles, machinery, patents, even credits) are contributed. These require independent valuation.
- Credit compensation: debts are converted into shares or stock, reducing liabilities and improving net worth.
- Expansion charged to reserves: there are no new contributions, but reserves are converted into capital, strengthening the company’s accounts.
It is important to remember that expansion charged to reserves does not imply an inflow of money into the company, but rather an accounting reclassification that strengthens net worth.
According to legal form
Limited liability companies (S.L.) and public limited companies (S.A.) can carry out capital increases, but the procedures differ.
- In an S.L., reinforced agreements or unanimity may be required when the capital increase affects ancillary obligations, the nominal value, or rights inherent to the shares. In an S.A., capital increases are more flexible, although they require the offer to be published and the shareholders’ preemptive subscription rights to be respected.
In both S.L. and S.A., the partners have preemptive rights to participate in capital increases, unless the Board agrees to exclude them with the legal guarantees.
Depending on the number of transactions
This may involve a single expansion, carried out in a single act, or successive expansions, in which progressive capital increases are executed in accordance with the financial needs of the business.
How to carry out a capital increase step by step
Carrying out a capital increase requires following a well-structured legal and accounting process. These are the main steps for increasing share capital:
1.Analysis of the need
The company’s financial situation, the objective of the increase, and its impact on the corporate structure are evaluated. It is advisable to seek the advice of an expert in commercial consulting.
2. Call and agreement of the Board
The administrative body calls the shareholders to approve the capital increase, indicating the amount, the type of contribution, and, if applicable, the cancellation of preemptive subscription rights.
3. Disbursement or contribution
The agreement is formalized before a notary, modifying the article of the bylaws relating to share capital.
- If it is monetary, the partner deposits the contribution in a bank account in the name of the company and it is accredited by means of a certificate.
- If it is non-monetary, an appraisal of the asset or right contributed must be carried out (in S.A. it requires an independent expert report).
- In the case of credit compensation, it must be proven that the debt is liquid, due, and enforceable. Elevation to public deed
4. Registration in the Commercial Registry
Until registered, the capital increase is not effective against third parties.
5. Accounting update and communication
The company books are updated, accounting entries are recorded, and banks, suppliers, and public bodies are informed.
How capital increases affect shareholders
Capital increases modify the ownership structure and the political and economic rights of the company, so their impact must be carefully analyzed.
They also have direct effects on both current and new shareholders:
- Dilution of shareholding: if a shareholder does not participate in the capital increase, their percentage of ownership is reduced.
- Entry of new shareholders: this can improve management and access to resources, but it can also change the balance of power.
- Change in political and economic rights: the new capital can alter the distribution of dividends or control of the board.
- Personal taxation: depending on the type of contribution, there may be implications for personal income tax, corporate income tax, or transfer tax and stamp duty.
- Business valuation: the transaction influences the overall valuation of the company, which has an impact on possible future transfers or family successions.
In family businesses, it is essential to plan the capital increase with a strategic vision: not only to strengthen the balance sheet, but also to maintain family cohesion and the continuity of the project.
Practical example of capital increase
Let’s imagine a fictional family business: Fusión S.L., which manufactures industrial components. It is owned by three brothers, with a share capital of €100,000, each with a 33.3% stake.
After several years of moderate profits, they want to expand into Portugal, but the bank requires them to strengthen their solvency. They decide to carry out a capital increase of €200,000, of which:
- €100,000 will be contributed by the three current partners (in proportion to their shareholding).
- €100,000 will be contributed by a new strategic investor from the logistics sector.
After the transaction:
- The share capital amounts to €300,000.
- The founding partners retain a combined 66.6%, and the new investor enters with 33.3%.
- The company improves its solvency ratio, obtains a credit line of €500,000, and is able to execute its expansion plan.
This practical example of capital increase shows how a family-owned SME can use this tool to grow without resorting exclusively to debt.
This type of transaction is becoming increasingly common among family-owned SMEs seeking to grow without resorting exclusively to bank financing.
Advantages and disadvantages of a capital increase
Before making a decision, it is important to weigh up both the benefits and the potential risks of a capital increase.
Advantages of a capital increase
- Strengthens net equity and reduces debt.
- Improves the financial image with banks and suppliers.
- Allows for the financing of growth or internationalization projects.
- Facilitates the entry of new strategic partners.
- In family businesses, it can serve to balance participation between generations or facilitate the orderly exit of a partner.
- Possibility of carrying out increases charged to reserves, without the need for new external contributions.
- Improves solvency ratios and allows compliance with financial requirements demanded by banks or investors.
Disadvantages of a capital increase
- Dilution of control for partners who do not participate in the increase.
- Notary, registration, and advisory costs.
- Possible internal conflicts due to the entry of new investors.
- Risk of negative interpretation if the increase is carried out to cover losses.
- Tax implications in certain cases (e.g., non-monetary contributions or credit compensation).
- It can generate tensions in family businesses if it is not structured properly or if the entry of new partners alters the internal balance.
A capital increase should be considered an investment in stability and the future, not just a one-off financial transaction.
Legal and tax considerations where Leialta can help you
At Leialta, we are experts in commercial consulting, tax advice, and corporate planning. Capital increases may be exempt from ITP-AJD (transfer tax and stamp duty) in certain cases, but it is essential to analyze each case with professionals to avoid tax contingencies.
We can help you design and execute a capital increase tailored to your business reality:
- Preliminary diagnosis: financial analysis and evaluation of alternatives.
- Design of the operation: choice of type of capital increase, valuation of contributions, and drafting of agreements.
- Family governance and shareholder agreement: conflict prevention and succession planning.
- Tax and legal management: tax analysis (ITP-AJD, IRPF, IS), drafting of corporate agreements, and support during the notarization process. Comprehensive support: from the planning phase to registration in the Commercial Registry.
Contact us to analyze whether a capital increase is the best strategy to strengthen your family business or professionalize your SME.
Our team of lawyers and tax advisors will guide you step by step to ensure that the process is smooth, secure, and efficient.
