A Finnish limited liability company is a specific corporate form governed by strict regulations, particularly the Finnish Companies Act. The use of funds in a limited liability company is closely regulated to safeguard the rights of shareholders, creditors, and other stakeholders, ensuring that the company operates transparently and fairly. In this article, we will discuss the key issues regarding what is allowed and what is prohibited in the use of funds in a Finnish limited liability company.
1. General Principles of Using Company Funds
According to the Finnish Companies Act, the funds of a limited liability company must be used for the company’s business activities and purpose, which is generally to increase shareholder value in the long term. Any decisions regarding the use of company funds must serve the company’s business objectives and be in the best interest of its shareholders. This means that using company funds for personal gain is prohibited unless it can be justified as serving the company’s business interests.
2. Permissible Use of Company Funds
There are many permissible uses of company funds as long as they align with the company’s purpose. These include:
- Business Expenses: The company may use its funds for normal business expenses, such as wages, rent, marketing, and purchasing goods.
- Investments: The company may use funds for investments that support the development of its business, such as acquiring machinery, equipment, or other resources.
- Dividends: The company may distribute profits to its shareholders in the form of dividends, but only if the profits to be distributed are legally distributable, and the company has sufficient means to continue its operations and fulfill its obligations after the distribution.
- Bonuses and Incentives: The company may pay bonuses and incentives to management and employees, provided they are reasonable and support the company’s business objectives.
3. Prohibited Use of Company Funds
While a limited liability company has the freedom to decide how to use its funds within the scope of business activities, there are clear restrictions and prohibitions in place to protect the financial stability of the company and the interests of shareholders.
- Distribution of Funds to Shareholders Without Legal Basis: Distributing funds to shareholders outside of legally regulated situations, such as in the form of dividends or upon the liquidation of the company, is prohibited. For instance, if a shareholder withdraws company funds for personal use without a valid business reason, it is illegal.
- Paying for Personal Expenses: Using company funds to cover personal, non-business-related expenses is prohibited. This could include, for example, paying for private trips or personal purchases of a shareholder or board member with company funds.
- Lending Funds to Shareholders or Management: Contrary to the earlier statement, the Finnish Companies Act does not outright prohibit the lending of funds to shareholders or management. Such loans, often referred to as ”related party loans” (lähipiirilaina), are allowed under certain conditions. The loans must adhere to the company’s general financial principles, serve the company’s interests, and be granted on market terms (e.g., with appropriate interest and collateral).
- Distributing Funds in Loss-Making Situations: The company may not distribute funds to shareholders if it lacks sufficient distributable funds or if it is operating at a loss and unable to meet its obligations. In such a situation, distributing dividends or other forms of funds could jeopardize the company’s financial position and the interests of creditors.
4. Consequences of Illegal Distribution of Funds
Illegal distribution of funds is a serious violation, and it may result in personal liability for the shareholders or board members involved. If a shareholder or board member withdraws funds unlawfully, they are required to return the funds to the company. Additionally, such actions may lead to criminal consequences, including fines or even imprisonment.
The Finnish Companies Act imposes a duty of care on the board members, meaning they must act in the best interest of the company. If board members approve illegal fund distributions, they may be held personally liable.
5. Related Party Loans (Lähipiirilaina)
Related party loans refer to loans granted to individuals close to the company, such as shareholders, board members, or other key individuals in management. Finnish law allows these loans under certain conditions:
- Market Terms: The loan must be granted on market terms, meaning the interest rate, collateral, and other conditions must correspond to what the company would offer to an independent third party.
- Company’s Interest: The loan must serve the company’s business interest and cannot be solely for the personal benefit of the recipient. The company must ensure the loan does not harm its financial standing.
- Documentation and Transparency: Related party loans must be properly recorded in the company’s financial statements, and sufficient information must be disclosed to auditors and other stakeholders to ensure transparency.
6. General Principles of Fund Distribution
Even though related party loans are allowed, they must comply with the general principles of fund distribution under the Finnish Companies Act. This means that loans should not undermine the company’s liquidity or create problems for creditors. If the company is facing financial difficulties or operating at a loss, granting related party loans is generally not acceptable.
Conclusion
The use of funds in a Finnish limited liability company is strictly regulated. Fund-related decisions must always serve the company’s business interests and comply with the provisions of the Finnish Companies Act. Illegal use of funds can have serious legal consequences, including personal liability for shareholders and board members. It is essential that the company’s management and shareholders are familiar with legal requirements and adhere to them in all business activities to ensure the company operates lawfully and ethically