The statutory reserve is a useful resource to keep a company’s financial health up to date, and can be adopted by any type of business. Its use is not mandatory and its use must be guided by what is defined in the company’s bylaws.
In any case, statutory reserve is a common practice, and understanding it better is important for those who are in the business world, or for those who want to enter it. Continue in the text and clarify your doubts on this subject.
What this article covers:
What is the statutory reserve?
In the business world there is a practice widely used to protect the financial balance of companies. These are profit reserves, these reserves are formed by the profits of the companies that are not distributed among the partners and shareholders. And among them is the statutory reserve.
In practice, this reserve is an account that gathers the net worth that is the result of profits of a legal entity. Its creation and use must be well defined in the company’s statute, which is why its name is “statutory”. In other words, its creation is not mandatory (there is no law that determines this) and depends directly on the statutory text.
The statutory reserve joins other accounts that are also part of the companies’ accounting structure, such as the legal reserve, reserve for contingencies, profit reserve for expansion, tax incentive reserve, among others.
How does the statutory reserve work?
The operation of this reserve is very simple. Whenever a company periodically calculates its net profits, part of this money, after the distribution of dividends, must be directed to the statutory reserve account. These values are kept and can be used, for example, in unforeseen situations that generate account imbalance.
This type of reserve is optional (unlike others, such as the legal reserve), but once its existence is established in the company’s bylaws, this fund cannot be ignored and must be used.
How to create a statutory reserve?
In order to effectively create a statutory reserve, it must be voted on and approved at the meeting, as this is the only way to become part of the company’s bylaws.
In addition, its elaboration must be guided by some legal guidelines. The first concerns the need to clearly and completely indicate the purpose of creating the account. The second guides the creation of criteria for the use of accumulated amounts in the reserve. The third, finally, establishes the maximum limit of the account.
Why does a company use the statutory reserve?
As it is optional, the money from the statutory reserve can be used for anything, as long as all the guidelines determined in the bylaws, which were thought of at the time of its creation, are followed.
Despite this, this feature, in practice, cannot be used in any way, as there are already other reservations in the company aimed at specific situations. Thus, their creation and use must make sense and be linked to a practical objective that is not contemplated by the other reserves.
What are the consequences of non-compliance with the statutory reserve?
The fact that the statutory reserve is freely created, that is, it is not linked to any law, means that failure to comply with the rules established in the statute for its use does not generate clear and objective penalties.
The only scenario in which irregularities practiced with this fund can generate repercussions is when there is a manifestation of the parties involved, such as the shareholders. In this case, legal measures can be taken and the company’s management must answer for the transgression of what was established in the statute.
As seen, the statutory reserve is a resource that guarantees more financial security for companies and that must be guided by the statutory text of the formation of the private company. Its existence may be important, but it is not indispensable for business.