If the contingency fund decreases for any reason, it must be replenished in the same manner as it was constituted. Article 21 of the General Law on Commercial Companies provides that any agreement between companies contrary to the constitution of the reserve fund is null and void, i.e. although the partners decide not to constitute it, the agreement is null and void. The same article 21 of the General Law on Commercial Companies also stipulates that if this reserve fund has not been created or has not been increased, the directors are liable, that is: “They are obliged, without limitation and jointly and severally, to remit to the company an amount equal to that which should have been separated”. Only the trustees are safe if the fund has been distributed. Similarly, this article stipulates that the legal reserve, when capitalised, shall not be deemed to be distributed, but in that case shall be replenished from the year following the year in which it is capitalised in accordance with Article 20. In the following text you will find everything you need to know about the legal reserve, what percentage they are formed, how the value of each individual reservation is determined, what maximum limit they must comply with and to what extent they can be used. Therefore, the statutory reserve is based on profits made over the years and is calculated after amortization of contributions for officers, directors, etc., social security contributions and other business costs, as well as©financial and business expenses and expenses. Thus, the legal reserve of the company in this case is $ 1000, which must be accumulated on the basis of this reserve in order to increase the impact share compared to a possible negative year.

In this case, income tax on profit is determined without deduction of the reserve, and once income tax is determined, it is deducted to determine the liquid profit on which the legal reserve is calculated. The legal reserve can only be used for provisions other than the law, and this only allows its use to cover losses, as stated in Article 456 of the Commercial Code: the reserve fund must be replenished in the same way if it is reduced for any reason. As explained above, the legal reserve is a tool that many companies use to obtain financial support for new investments or productions that may destabilize their economy. In this regard, the L.C. Antonio Castillo Sánchez, tax advisor at IDC Asesor Fiscal, Jurídico y Laboral, explains the procedure for building up the legal reserve from 2019 profits, the case of a variable company founded in 2016, as shown below: this type of reserve is a subset belonging to a broader category of reserves, which come from companies` retained profits and also© from special reserves, statutory and voluntary, to name a few. The common feature of these categories is that they arise from the economic profit of the company`s activity, i.e. if that year`s result has a positive balance. Since they do not constitute share capital as such, reserves are considered profits, which are included in the company`s own funds as passive capital, although they must have a counterpart in the assets.

This means that they are part of the financing of the company as such and therefore cannot be sold for distribution as dividends, except in certain special cases. Initially, a legal reserve is the amount of assets that the company stores by removing a small percentage of its net capital and adding it to past values to generate registered capital that serves as support in case of financial problems during annual production. The same article 36 of the Commercial Code states that at least five percent (5%) must be separated each year to form the legal reserve, the above gives an open letter to companies that if they need to separate a higher percentage, they can do so without prejudice to laws. This can be beneficial as a type of savings and have a very specific plan to deal with complex situations in the future. The legal reserve is mandatory if the company has profits on which it can set the reserve. The legal reserve is one of the most commonly used economic instruments, as it allows companies to create and maintain economic support that meets all eventualities. “Foreign companies with permanent activities in Colombia shall constitute the reserves and regulations required by the law of national public limited companies and must comply with other requirements established for their control and supervision.” That is, the legal reserve is a percentage of our profits that is intended to be stored and accumulated until it has to be used to compensate for economic difficulties that may arise in the future. If the statutory reserve is insufficient to cover the capital gap, social benefits from subsequent years shall be used for this purpose.` If that company reaches the point where the annual statutory reserve exceeds one fifth of the share capital available for financial security, that statutory reserve becomes the investment currency available to the company; this is explained by the General Law on Commercial Companies (LGSM). The obligation to constitute a legal reserve is provided for by the Commercial Code and applies to the following companies: The legal reserve is no longer mandatory when 100% of the 100% introduced is fulfilled, as in the legal reserve The legal reserve is a type of regulation in some companies, which is used in commercial law as a legal guarantee for the activities and operations carried out by the company, if she can`t react. or must compensate their creditors for defaults on payments or other economic and financial liabilities. For example, if the share capital of the corporation is $100,000,000 and the legal reserve has accumulated $70,000,000, it means that the corporation has a legal reserve $20,000,000 higher than required by law, so you can take that $20,000,000 and give it the use intended by the meeting. For the financial statements to be presented correctly, it is necessary that the relevant accounting documents are drawn up to reflect the final amount of the legal reserve, as well as to transfer the balance of the profit and loss account for the year to the accumulated profit.

Perhaps one of the most practical examples is the observation of the behaviour of the legal reserve within a company: in this sense, after the approval of the annual accounts by the meeting, the statutory reserve is created. “Application of anonymous rules on legal reserves, balance sheets and profit-sharing. The company constitutes a legal reserve, subject to the rules on anonymous public access. The same rules apply to annual balance sheets and profit-sharing. The corporation may take this surplus and build up or increase a statutory or occasional reserve or distribute it as a dividend to shareholders.