Negative or low equity (omakapital) is common for startups and for companies after a weak year. It’s not just a “red number” in the balance sheet: equity affects dividend decisions, how a bank reads your financials, and what explanations you may need to provide in the OÜ annual report.
Below is a practical workflow: first confirm the numbers, then diagnose the cause, and finally choose a legal way to restore equity and disclose it properly.
In practice, before filing, verify the requirements in Commercial Code (ÄS) and Accounting Act (RPS).
First, make sure the numbers are correct
Before you try to “fix equity”, confirm the issue isn’t caused by bookkeeping errors:
- bank reconciliation as of year-end (31.12 or your reporting date);
- reconciliation of shareholder loans and related-party settlements;
- correct classification of owner-paid expenses (no personal expenses booked as company costs);
- prepayments and accruals are closed (no accounts left hanging).
Very often equity “drops” because of a couple of mistakes: a misclassified loan or payables that were never properly closed.
Diagnose the cause (short and practical)
Equity usually becomes problematic due to:
- accumulated losses;
- large one-off expenses (product development, marketing, expansion);
- incorrect postings related to loans or owner settlements;
- personal expenses recorded as company expenses;
- write-offs / provisions on receivables.
First identify the cause → then choose the right recovery tool.
Ways to restore equity (case-by-case)
Operational profit and cost control
The cleanest path: return to profitability and retain profits in the company.
Shareholder contribution
You can strengthen equity via a shareholder contribution (the legal form depends on the situation and corporate structure). The key is to document it and post it correctly.
Restructuring shareholder loans
If a loan is “weighing down” the balance sheet, companies sometimes change terms or restructure the arrangement to reflect economic reality — within the law and with proper documentation.
Legal share capital changes
In some cases, companies use formal share capital changes (increase/decrease). This is a legal procedure and should be planned carefully.
“Cosmetic” fixes without documents (just moving lines around) are a bad idea. This typically surfaces during an audit or in a bank review.
What not to do
- declare dividends “to take money out” while equity is problematic;
- mix personal expenses with company expenses;
- leave shareholder loans without contracts or clear terms.
What to write in the annual report (if equity is low)
If an explanation is needed, keep it short: state the reason (losses / investments) and the recovery plan. A transparent explanation looks far better than silence.
Checklist
- Bank and shareholder loans are reconciled.
- The reason for negative equity is clear.
- A recovery tool is chosen and documented.
- No dividends are declared until equity is restored.
- The plan is reflected in disclosures (if needed).
See also on blog.accres.eu
How we can help
If you want to solve this quickly and avoid refiling: we can review the numbers, prepare the report in e‑Äriregister, help with documentation, and take it all the way to filing. Contact us.
Link to board duties and shareholders’ decisions
When equity “drops”, it’s not enough to understand the economics — you also need to document management decisions properly:
- record in a shareholders’ decision that the situation was reviewed;
- define the action plan (contribution, restructuring, cost reduction);
- adjust payout strategy (no dividends until stability is restored).
Even if the law doesn’t require a “multi-volume report”, banks and investors often ask: “what are you doing about negative equity?”. The best answer is: “we have a plan and documents”.
Equity below share capital: what to check
In practice, OÜs are particularly sensitive when equity drops below share capital. In that case:
- avoid any payouts that make equity worse;
- make sure shareholder loans and owner-paid expenses are reflected correctly;
- evaluate whether a contribution or legal capital changes are needed.
Documents you typically need (to make the fix “legal”)
- shareholders’ decision on the chosen option (contribution / capital change / plan);
- loan agreement / updated terms (if applicable);
- bank confirmations of money movements;
- correct postings and supporting details in the notes (lisad).
How it affects the annual report
- Notes (lisad): disclosure of loans and material balance sheet items becomes mandatory in most cases.
- Management report (tegevusaruanne): even micro companies sometimes benefit from (or need) a short explanation of the cause and recovery plan.
- Public perception: a report with a transparent explanation reduces suspicion, especially for banks.
30-day mini plan (if equity is negative)
Week 1: reconcile bank/loans and inventory liabilities.
Week 2: fix bookkeeping, collect documents.
Week 3: choose the recovery tool and prepare the shareholders’ decision.
Week 4: post the changes and prepare the report + notes (lisad).
Don’t confuse a loan and a contribution (common mistake)
- Loan = the company must repay the money (recorded as a liability).
- Contribution / capitalisation = strengthening equity (different logic and documents).
Misclassification makes the report worse: you either “inflate” liabilities, or raise questions about the source of equity.
Common mistakes
- moving balance-sheet lines without documents;
- not disclosing loan terms in the notes (lisad);
- trying to pay dividends with weak equity;
- skipping reconciliations and “treating” the wrong root cause.
FAQ
Can we “fix” negative equity by simply transferring money to the company bank account?
Only if it is documented correctly (contribution or loan) and posted properly with supporting documents.
Why do banks care so much about equity?
Because equity signals resilience and the ability to cover obligations. Negative equity needs a clear explanation and a recovery plan. See also: shareholder loan.