Companies Act 19,550 · Article 70 — Legal reserve

The 5% legal reserve (LGS art. 70)

Section 70 of the General Companies Law requires limited liability companies and companies limited by shares to create a legal reserve of at least 5% of realized and liquid profits for each financial year until it reaches 20% of stated capital. If the reserve is reduced, profits may not be distributed until it is restored.

Source: Act 19,550

What article 70

Section 70 establishes the mandatory legal reserve and the framework for discretionary reserves.

Official text · Act 19,550, art. 70

Limited liability companies and companies limited by shares shall set aside a reserve of not less than five per cent (5%) of the realized and liquid profits shown in the income statement for the financial year until it reaches twenty per cent (20%) of stated capital. If this reserve is reduced for any reason, profits may not be distributed until it is restored.

Other reserves. Any type of company may create reserves in addition to the legal reserves, provided they are reasonable and consistent with prudent management. In companies limited by shares, where such reserves exceed stated capital and legal reserves, the decision shall be adopted in accordance with the final part of article 244; in limited liability companies, the majority required to amend the company agreement is required.

Source: Law 19,550, art. 70 - InfoLEG (updated official text)

Commentary

The legal reserve is a mandatory capital cushion: it retains part of profits to strengthen the company and protect third parties. It is 5% per year until it reaches 20% of capital; if reduced, distributions are suspended until restoration.

Discretionary reserves are valid if reasonable and consistent with prudent management. Large reserves require special majorities to prevent majority shareholders from withholding profits abusively from minorities.

Distinctions often confused

Legal reserve is not the same as Discretionary reserve. The legal reserve is mandatory (5% until 20% of capital); discretionary reserves are voluntary, must be reasonable and may require special majorities.

Practical impact

Failure to create the legal reserve or distribution of dividends while it is impaired is an irregularity that may expose directors to liability. Excessive discretionary reserves may be challenged by minority shareholders.

Frequently asked questions

How much is the legal reserve?

5% of the realized and liquid profits of each financial year until it reaches 20% of stated capital.

May dividends be paid if the reserve has been reduced?

No. While the legal reserve is impaired, profits may not be distributed until it is restored.

This page is informational and does not constitute legal advice nor replace professional consultation. It quotes the official text of the rule; for its application to a specific case, consult a licensed professional.

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