Capital contributions: do I have to contribute "cash" when I create my company?

Are you planning to start your business but wondering about the different types of contributions possible? This article sheds light on contributions in cash, tangible assets, and expertise, along with their advantages, disadvantages, and best practices for evaluating and formalizing them. Through concrete examples and practical advice, you’ll gain a better understanding of the stakes involved in each type of contribution, helping you make informed decisions to successfully launch your venture!

What is a contribution?

A contribution is the act by which you provide something to a company, either being created or already existing, in order to become a partner and obtain a share. This share is proportional to the value of your contribution. You can also increase your share by making an additional contribution to the company. These contributions are recorded in the company's articles of association and serve as a guarantee for its potential creditors. 

When you create a new company, you can make several types of contributions as a founder. The main categories are as follows:

1. Cash contributions: this is cash that you can "put on the table", i.e. it is money in cash.
2. Contributions in kind: these are contributions of goods other than money. They can include:
   
   • tangible property, such as equipment, vehicle or stocks.
   • intangible property, such as patents, trademarks, software and operating rights.
3. Industrial contributions: although less common, these are contributions relating to the skills or expertise that a partner provides to the business. They can include services, technical knowledge or professional contacts. 

Contribution in Cash

This refers to the contribution of a sum of money. The amounts contributed are deposited into a blocked bank account in the name of the company. Cash contributions are a valuable tool for financing businesses and have several advantages:

• Strengthening Financial Stability: It helps to increase the company's equity, thereby enhancing its financial stability. This can be important for obtaining a loan.
• Financing Investments: It can be used to finance the company's investments, such as purchasing equipment, developing new products or services, or hiring new employees.
• Improving the Company's Image: A significant cash contribution can enhance the company's image with investors, customers, and suppliers.

Contributions in kind

Contributions in kind are contributions that partners of a small business provide in the form of property other than money. Contributions in kind can help to launch or develop a business by using existing assets, but here too, the complexity of evaluating the property can cause disputes.

Here is a detailed overview of this type of contribution, focusing on the important elements to be considered.

Types of contributions in kind

1. Tangible property:
   
   • Equipment: machines, tools, computers, vehicles, etc.
   • Stocks: products or raw materials intended to be used or resold by the company.
   • Property: land, buildings, offices or warehouses, etc.
      
2. Intangible property:
   
   • Patents: intellectual property rights over inventions.
   • Trademarks: commercial identity or logos.
   • Artistic or literary creations, etc.

A contribution (industrial or in kind) must satisfy the condition that it can be evaluated using economic criteria. The evaluation is carried out by the partners who can of course be assisted by experts.

However, it may be necessary to use a company auditor (as well as a notary who will be responsible for executing the notarial act in the case of the incorporation, an additional contribution in kind or a capital increase) who will produce, among other things, an audit report of the evaluation. The company auditor does not carry out the evaluation, but must give their opinion on it.

Specific legal or procedural requirements must be observed. For example, the founders or administrative body must draft a report in which they set out the benefit that the contribution brings to the company and in which they must, where applicable, also comment on the reasons why they have deviated from the conclusions of the company auditor's report.

Evaluation examples of a contribution in kind

Each contribution in kind must be evaluated to determine its value. This may require field research, the intervention of specialists in the sector, etc.

Example 1: contribution in kind relating to a computer programme

Let's imagine that a partner wants to provide a project management software package that they have developed and that this software is intended to be used by the new company. This software will allow the planning and tracking of tasks and resource management.

There are two approaches to consider when evaluating the software's value;

• Development cost: this involves calculating the total development cost for the software. For example, if the partner has spent 300 hours developing the software at an hourly rate of €50, the development cost will be evaluated at 300 hours x €50 = €15,000.
• Market value: this means researching similar software packages on the market to estimate the market value. Let's assume that a comparable software package sells for approximately €20,000.

The partners can then chose the most appropriate and realistic evaluation method. In general, for software, it is common to take the market value as a baseline, but in this case, we can opt to use the development value, especially if the software is not yet being marketed. It is also possible to combine both methods.

There are also administrative procedures to be completed, as in this example, checking that all rights related to the software are transferred to the company and that the conditions of use are clear.

Example 2: contribution of a trademark and visual identity

Let's imagine that a partner wants to contribute a trademark and visual identity to a new company. The trademark has been developed by the partner and registered with the Benelux Intellectual Property Office.

The trademark's value can be evaluated based on time spent and past costs:

• Creation costs:
  
  • Logo design: let's assume that the partner paid a designer €3,000 to create the logo and visual identity.
  • Registering the trademark and miscellaneous fees: let's assume the costs amount to €1,000.
• Total creation cost:
  
  • €3,000 (design) + €1,000 (filing and fees) = €4,000

The evaluation can also be carried out based on the estimated market value: this then means researching similar trademarks in the sector to estimate their value and aligning with this provided that it seems to indicate a true commercial potential.

The evaluation can be carried out by considering both the creation cost and the market value.

A contract must be drawn up to formalise the transfer of rights related to the trademark and visual identity, including the rights of use, conditions for updating, etc.

Contributions of assets you owned prior to the date of your company's creation

Property previously acquired as part of your private assets can be used - in whole or in part - for professional purposes. So, if you purchased material, objects or equipment before becoming self-employed you can deduct these, either as investments (via depreciation) or as overheads.

The transfer of a private asset to a business will be the subject of a document, which must contain a description of the relevant property. This document, which can be drafted by the business founder themselves, is identical to a "sales invoice" (the term invoice or asset transfer can also be used).

Evaluation

The professional acquisition value for these assets acquired before the business was started must be estimated based on the market value of the second-hand good in a fully competitive market, on the day of transfer.

It will often be difficult to determine an exact amount. However, responsibility for this evaluation lies with the future business owner. The tax authorities may contest it, but will have to justify such a challenge.

Do not rely solely on prices asked online; the true price is the one a purchaser would agree to pay. So, look for transactions that have actually been completed for a similar good.

You can also take the price as new and apply a reduction based on wear and tear, age and damage to your equipment.

VAT

When transferring an asset to your business, no VAT can be deducted on that asset in the context of your professional activity. Nor will VAT be applied to the transfer price. Indeed, the good has been acquired from the private estate and has not therefore been subject to VAT. The amount indicated on the allocation document will be "considered inclusive of all taxes".

Contribution of personal assets to a company

It is also possible to contribute assets that you personally own to a company (new or existing) so that the company can use them. The difference is that this contribution is actually a sale, because there is a transfer in the legal sense of the word. The asset no longer belongs to the physical person, but to the company.

As a seller acting privately, you therefore draw up an invoice with the company's address details. This document is identical to a sales invoice or a purchase note. Any conflict of interest must be avoided. There are also formalities to be observed (official reports, etc.) so request the assistance of your chartered accountant.

VAT

If a company founder sells or contributes a private asset to a corporation as a private individual, no VAT will be due because the asset has come from their private estate. 

Industrial contributions

Industrial contributions are therefore non-financial contributions that partners provide to a company. These might be:

1. Skills and expertise: this includes professional qualifications, technical skills, expertise in a specific field, etc.
2. Services: the provision of specific services such as management, consultancy or commercial development.
3. Professional network: commercial contacts or relationships that can benefit the company, etc.

Within Private Limited Liability Companies (SRL - Société à Responsabilité Limitée) and Cooperative Companies (SC - Société Coopérative), the Code of Companies and Associations (CCA) allows industrial contributions to be remunerated in shares.

It can be complex to evaluate an industrial contribution as there is no standardised method for quantifying this type of contribution. This often means that partners must agree on the estimated value.

In addition, it is recommended that such contributions are referred to in the company's articles of association so as to clarify the responsibilities and contributions of each partner.

Advantages and disadvantages

Industrial contributions are a sign of the realities of our time, enabling partners to be involved in a business without the need for financial contributions. This encourages collaboration and the sharing of skills, knowledge and assets. However, such contributions can sometimes cause conflict in relation to the contribution's value and profit distribution if things are not clear. It is therefore recommended that these contributions are properly outlined in the articles of association and the expectations and contributions of each individual are clearly discussed.

Using a neutral professional can be extremely useful in avoiding misunderstandings.

Examples of industrial contributions

Example 1 :  evaluation of contribution in expertise

Let's imagine that a partner has digital marketing expertise and offers to contribute their services to a new company for a given period.

It would be advisable to proceed as follows:

1. Define the contribution:
   
   • For example, the partner agrees to provide digital marketing services for 20 hours a month for a period of 12 months.
2. Hourly rate:
   
   • The typical hourly rate for a standard digital marketing consultant is €75.
3. Calculation of the total contribution value:
   
   • Total hours: 20 hours/month x 12 months = 240 hours.
   • Total value of the contribution: 240 hours x €75 = €18,000

Of course, the partner may estimate that their contribution has an added value due to the benefit of their ideas, specific expertise, etc.

Once things have been clarified and agreed, it is recommended that this commitment is formalised in a contract which sets out and confirms the services provided, the duration of the contribution and the estimated value. In the company's articles of association, it would be wise to mention that the industrial contribution has been valued at €18,000, specifying the services and conditions.

Example 2: evaluating a contribution of commercial contacts to be used

Evaluating an industrial contribution based on commercial contacts can be slightly more abstract as it does not involve services or measurable time, but a network of relationships that may or may not lead to commercial opportunities. Here is a calculation example to provide a better illustration of this type of contribution.

Let's imagine that a partner has a network of contacts in the distribution sector and agrees to make these contacts available to the company to generate business opportunities.

This is how we could proceed:

1. Define the contribution:
   
   • The partner provides a network of 50 contacts in the distribution sector and agrees to introduce the company to these contacts in the hope of securing partnerships or sales.
2. Estimate the value of the opportunities generated:
   
   • Let's assume that the partner estimates that, on average, each contact could generate a business opportunity worth about €5,000 in terms of potential revenue.  If we consider that a successful introduction could result in business with 10% of contacts, that represents five opportunities.
3. Calculation of the total contribution value:
   
   • Estimated value of opportunities: 5 contacts x €5,000 = €25,000.

The contribution of commercial contacts may bring significant value to a business, but its evaluation requires a methodical approach and open discussions between partners. The evaluation of commercial contacts is subjective and depends largely on the quality and relevance of the relationships. An agreement on this evaluation needs to be reached before the company is created.