Equity below half of share capital: steps and deadlines
| Step | Deadline | Provision |
|---|---|---|
| The accounts show equity below half of share capital | When the accounts are approved | Commercial Code, art. L. 223-42 (SARL) and L. 225-248 (SA and SAS) |
| Decision on early dissolution (SARL) or extraordinary general meeting called (SA) | 4 months after the accounts are approved | Same articles |
| Equity restored or share capital reduced | By the end of the second financial year after the one in which the losses were recorded | Same articles |
| Otherwise, if capital exceeds a threshold set by decree: capital reduced to that threshold | By the end of the second financial year after that deadline | Same articles, Decree no. 2023-657 |
Does the rule apply to your company?
The test: take the equity line on the liabilities side of the balance sheet and compare it with half of the share capital. Equity includes share capital, reserves, retained earnings and the result for the year. Accumulated losses reduce it, and it can become negative.
Example: a company with €50,000 of share capital shows €18,000 of equity at year end. Half of the capital is €25,000. Equity is below that line: the procedure applies, and €7,000 is missing. These figures are a worked example.
Step one: decide on dissolution within four months
In an SARL, the shareholders decide, within four months of approving the accounts that show the loss, whether to dissolve the company early (article L. 223-42 of the French Commercial Code). In an SA, the board must call an extraordinary general meeting for that purpose within the same period (article L. 225-248).
The decision is required even if nobody wants to dissolve: the shareholders can resolve to carry on. Either way, the resolution is published as set by decree.
Step two: restore equity by the end of the second following year
If the company is not dissolved, it must, by the end of the second financial year after the one in which the losses were recorded, either restore its equity to at least half of its share capital or reduce its share capital so that equity reaches at least half of it.
In the example, with a calendar financial year, the 2025 accounts are approved in 2026: the losses are recorded during 2026, and the company has until 31 December 2028.
Ways to put things right
| Option | Effect |
|---|---|
| Profits in the following years | They restore equity without any change to share capital |
| Capital increase | New contributions increase equity. See the effect on the cap table with our dilution simulator |
| Converting shareholder loans into capital | The debt owed to the shareholder becomes capital |
| Waiving shareholder loans | The debt disappears and improves the result |
| Capital reduction to absorb losses | Capital falls, and so does the half-capital line |
| Capital reduction followed by an increase | Losses are cleared, then new money comes in |
Each option affects the cap table, the shareholders’ tax position and relations with banks. The choice is made with the company’s accountant and lawyer.
What changed in 2023: reduction to the threshold
Articles L. 223-42 and L. 225-248 were amended by Act no. 2023-171 of 9 March 2023; the current versions date from 11 March 2023.
If equity has not been restored to half of share capital by the deadline, and share capital exceeds a threshold set by decree according to the size of the balance sheet, the company must, by the end of the second financial year after that deadline, reduce its share capital to no more than that threshold.
The threshold is 1% of the balance sheet total at the latest year end. For an SA, which has a minimum share capital, it is the higher of that amount and the minimum capital under article L. 224-2, below which capital cannot be reduced (Decree no. 2023-657 of 25 July 2023, articles R. 223-37 and R. 225-166-1).
If the company reduces its capital in this way without restoring equity, and later increases its capital, it must comply again before the end of the second financial year after the increase.
The risks of doing nothing
If the managers or the statutory auditor fail to trigger a decision, or the shareholders cannot validly decide, any interested party can ask the court to dissolve the company. The same applies if the capital has not been reduced to the threshold.
The court can give the company up to six months to put things right. It cannot order dissolution if, on the day it rules on the merits, the situation has been put right.
Weak equity also has immediate effects: it shows in the accounts and is read by banks, suppliers and credit insurers. If cash is under pressure, see our page on business insolvency.
Companies in insolvency proceedings: the rule does not apply
These provisions do not apply to companies in safeguard or judicial reorganisation proceedings, or to those under a safeguard or reorganisation plan.
