Third parties may require formation: In addition to shareholders, the company`s creditors may demand the incorporation of the legal reserve in summary proceedings. In a company, there may be several types of reserves, which may coexist and have a different purpose; On the one hand, the Commercial Code refers to the legal reserve, which is nothing more than the company`s obligation to retain ten percent of the profit of each financial year up to fifty percent of the subscribed capital, in which case it will not be necessary to deduct further from the said ten percent. Indeed, it is not possible to charge more than what is required by law, and the law only requires a reserve of up to 50% of the share capital. `The losses shall be offset by the reserves set aside for that purpose and, failing that, by the statutory reserve. Reserves intended to absorb certain losses may not be used to cover other losses unless the assembly so decides. The value of the legal reserve is the sum of all the accounting profits that this company has after this sum has already been liquidated without taxes or tax payments, 10% of this sum is available to be destined for the tax reserve of this company. Taking into account that the legal reserve must be accumulated in the share capital that, as defined above, the company stores as a method of hedging to support possible damages; The maximum limit that the statutory reserve may have would be one-fifth of the net share capital of the company. The legal reserve is a type of passive capital that serves as collateral for the activity of a company and represents a percentage of the total share capital. Although its value is deducted from profits not received by the partners, it does not increase the overall value of the business; The shareholder becomes a creditor of the reserves, because they are part of the value of the company`s equity. As can be seen, the accumulated legal reserve of $31,285.00, a figure that still does not exceed the amount of $60,000.00, which corresponds to one-fifth of the share capital (20%), so that $28,715.00 remains to be separated from the profit. The purpose of the reserve is to protect the assets of the company, so it cannot be used other than in this eventuality or eventuality. 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 concept of legal reserve refers to a type of mandate by which a commercial company reserves a certain amount of capital as collateral for its activity.
As a general rule, this sum corresponds to twenty per cent of the value of the total share capital. They are gained from the benefits of exercises until they reach that twenty percent. According to the Companies Act, companies are obliged to allocate 10% of profits to the statutory reserve each year, up to a maximum of 20% of the share capital. In this case, the amount of $28,715.00 will be deducted from the 2019 result to increase the legal reserve, with which it will have an amount of $60,000.00, representing one fifth of the share capital of the Company. It is important to note that legal reserves are elements created and prescribed by law. That is, they do not depend on the will of the employer. The latter cannot refuse to build up such reserves, nor does he have the right to dispose of the money according to his interests, the mechanism being subject to special rules. Assuming that a given company has earned a total of $10,000 net in the last year, 10% of this amount is deducted from this annual amount, which is directed to the reserve, as it is calculated that this percentage can cover possible negative figures that this company may have the following year.
The concept of legal reserve can be used to refer to the assets that a financial institution must deposit with the central bank as collateral for its liabilities. The amount of this reserve varies according to the legislation, although it is usually a percentage applied to a particular concept.