In practice founders of the Companies doing business seek to fund legally their company’s working capital. Replenishment of LLP working capital from the founders is possible in the form of a loan agreement concluded between the LLP and the founder (founders) or an increase in the authorized capital of the LLP.
This article will describe how to conclude a loan agreement between founder (lender) and Company and the procedure of and increasing the authorized capital of an LLP in order to replenish the LLP’s working capital.
Loan agreement. In accordance with the Civil Code of Kazakhstan, under a loan agreement, one party (the lender) transfers to the other party (the borrower) money or things defined by generic characteristics, and the borrower undertakes to promptly return to the lender the same amount of money or an equal number of things of the same kind and quality.1
The legislation of the Republic of Kazakhstan does not prohibit a legal entity (LLP) from receiving a loan from its founder(s).
However, according to the Civil Code, citizens and legal entities are prohibited from raising money in the form of a loan from citizens as a business activity and such agreements are considered invalid.2
According to the Entrepreneurship Code , “Entrepreneurship is the independent, initiative activity of citizens, candidates and legal entities, aimed at obtaining net income through the use of property, production, sale of goods, performance of work, provision of services, based on the right of private property (private entrepreneurship) or on the right of economic conducting or operational management of a state enterprise (state entrepreneurship).”3 That is, entrepreneurial activity is permanent and systematic.
It follows that lending money for purposes other than business is not prohibited. One-time or occasional borrowing cannot be considered as entrepreneurship and does not entail consequences in the form of invalidation of the loan agreement.
Therefore, in the loan agreement it is necessary to avoid phrases such as, for example, “the subject of the loan is transferred for the purpose of conducting the Borrower’s business activity” or “the loan is targeted - for the purpose of conducting the Borrower’s business activity.” Moreover, it is recommended to indicate in the agreement that the loan is not raised as a business activity.
A loan agreement is for compensation, unless otherwise provided by legislative acts or agreement. Consequently, a loan agreement can be concluded on a paid or gratuitous basis. According to the Civil Code, the borrower is obliged to return the loan subject in the manner and within the time frame stipulated by the agreement. 4The subject of a loan provided without a condition on the payment of interest may be returned ahead of schedule. The subject of the loan, provided with the condition of payment of interest, can be returned ahead of schedule with the consent of the lender, or if this is provided for in the agreement.5
The purposes of attracting such a loan may be: replenishment of working capital; payment for the concluded transaction; repayment of existing debt.
According to the Civil Code, for the use of funds, the parties may provide for a remuneration paid by the borrower in the manner and within the terms provided for in the loan agreement. 6But when paying interest on a loan to the founder, the LLP, as a tax agent, has an obligation to withhold personal income tax (IIT) at the source of payment. Therefore, in practice, such agreements are usually drawn up without interest.
Thus, receiving funds from the founder of an LLP on the basis of a loan agreement on a gratuitous basis does not entail tax obligations either for the LLP or for the founder. The loan amount must be returned to the founder within the period specified in the agreement.
How to draw up a loan agreement?
The loan agreement is concluded in simple written form. 7There is no requirement in law to formalize the agreement in notarial form. The agreement specifies the terms of the agreement such as the amount of the agreement, repayment period, loan, currency, interest or non-interest rate, rights and obligations of the parties and details of the parties. If the Charter of the LLP states that in order to issue a loan, it is necessary to hold a general meeting of the LLP participants or a decision of the sole participant, then accordingly it is necessary to draw up the minutes of the general meeting of participants or the decision of the sole participant.
Here you need to understand that according to the loan agreement, the LLP will eventually have to return the funds to the founder. If this option is not suitable for the parties, then the injection of funds into the LLP can be carried out by increasing the authorized capital of the LLP.
Increasing the authorized capital of a limited liability partnership as an option for replenishing working capital for a business. This option does not entail tax obligations, since the value of property received as a contribution to the authorized capital according to the Tax Code is not considered as income, and therefore is not subject to taxation.8 The transfer of property as a contribution to the authorized capital is not sales turnover, and is also not subject to VAT.9
What is the procedure for increasing the authorized capital of a LLP?
According to the Law on Limited and Additional Liability Partnerships, an increase in the authorized capital of a limited liability partnership can be carried out by:
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additional proportional contributions made by all participants of the partnership;
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increasing the size of the authorized capital at the expense of the partnership’s own capital, including at the expense of its reserve capital;
3. making additional contributions by one or more participants with the consent of all other participants;
4. acceptance of new participants into the partnership.10
When increasing the size of the authorized capital in the manner provided for in subparagraphs 1)-2), the size of the shares of participants does not change.11
When increasing the authorized capital by making an additional contribution by any of the LLP participants or newly admitted ones, the amount of such contribution is determined taking into account the size of their previous contribution to the LLP’s own capital and the need to recalculate the shares of all participants in the authorized capital.12
The decision is made by common agreement of all participants.13
The decision to increase the authorized capital is formalized in the form of minutes of the general meeting or a decision of the sole participant with amendments to the constituent documents.
The LLP is obliged to notify the body via https://egov.kz/cms/ru about the increase in the authorized capital within three months from the date the general meeting made a decision to increase the authorized capital. By the time of notification, deposits must be made in the amount of at least half of the amount by which the authorized capital is increased.
If the partnership does not notify the body that carried out its state registration, the increase in the authorized capital is recognized as failed.14
Author: legal consultant Aigerim Masatbayeva
1 Clause 1 of Article 715 of the Civil Code
2 Clause 3 art. 715 Civil Code
3Clause 1, Article 2 of the Entrepreneurial Code
4Art. 722 Civil Code
5Clause 1 art. 722 Civil Code
6Article 718 of the Civil Code
7Art. 716 Civil Code
8 Clause 1) clause 2 of Article 225 of the Tax Code
9 Clause 1) clause 5 of Article 372 of the Tax Code
10 Clause 1 Art. 26 of the Law on Limited and Additional Liability Partnerships
11Art. 26 of the Law on Limited and Additional Liability Partnerships
12Art. 26 of the Law on Limited and Additional Liability Partnerships
13Art. 26 of the Law on Limited and Additional Liability Partnerships
14Article 26 of the Law on Limited and Additional Liability Partnerships
