Difference between equity contribution and shares in LLC

Difference between equity contribution and shares in LLC

Difference between stake and share in trading companies

“In the day-to-day business operations and disputes among partners, the two terms are often confused, though they have entirely different roles and meanings. In our practice, the terms are equated, and most often the equity contribution/stake is determined proportionally according to the size of the share. In this article, we want to explain the basic differences and why they are important.

What is a equity contribution or a stake

An equity contribution to the company/stake’ refers to money, things, or rights which a partner, or shareholder, transfers and conveys to the commercial company in the process of foundation or in the process of increasing the company’s capital, or labor and services when this is allowed by law, and loan, or additional payment, which according to the provisions of the commercial companies law are transformed into a contribution/stake. Therefore, the contribution/stake can be monetary or non-monetary in the form of things, equipment, real estate, etc., which the partner invests in the company as capital with which the company works and manages.

What is a Share

Legal Definition of Share

A share in the company’ is a totality of rights and obligations which a partner acquires based on the contribution/stake to the company’s capital or governed by contract  in a public commercial company, limited partnership, and limited liability company, where each partner has shares.

Why is the Difference Between Contribution and Share Important

From the legal definitions, it is evident that the equity contribution/stake represents the invested capital in a commercial company while, on the other hand, the share represents the right that the partner acquires with the invested capital. The determination of the contribution is legally defined while the determination of the size of the share is left to the free agreement between the partners. This means that a person can invest 500 euros in a company which has 5000 euros of capital (contribution) but can have a 50% share.

On the other hand, the difference is important when it comes to convertible loans. In such situations, the company is given an amount much larger than the basic capital which can then be converted into a contribution to the company in a process of increasing the basic capital. Namely, the conversion can be realized with a large contribution and a small share, i.e., a business angel may invest 100,000 euros in the company, but acquire a share that does not correspond proportionally.

The difference is particularly important considering that depending on the share, the rights of the partners are determined and this has an influence on the management of the company and decision-making which can positively or negatively affect the further development of the company

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