The beginning of the year for limited liability companies does not only mean the completion of financial reporting, but also the making of important business decisions. After determining the results for 2025, the key question arises – what to do with the generated profit or how to cover a loss.
Although these decisions are often perceived as a formality, they have a significant impact on the company’s capital structure, liquidity, and tax position. This is precisely why it is important to approach them systematically and in accordance with applicable regulations.
Who Makes the Decisions?
The company’s management is responsible for preparing the annual financial statements, while the shareholders’ assembly makes the key decisions regarding:
- the allocation of profit, or
- the coverage of loss.
It is important to emphasize that profit cannot be automatically distributed to shareholders – a decision of the shareholders’ assembly is a necessary prerequisite for any distribution.
Options for Profit Allocation
If the company generated profit in 2025, it may be allocated in several ways, most commonly:
- retained within the company (retained earnings),
- distributed to shareholders,
- transferred to reserves,
- used to cover losses from previous periods.
In practice, these options are often combined, depending on the company’s plans, investment needs, and liquidity position.
Restrictions on Profit Distribution
Before deciding on profit distribution, it is necessary to check whether any legal restrictions exist.
The most important limitation applies when the company has uncovered losses from previous years – in such cases, profit distribution is not permitted until the loss is covered.
Additionally, profit distribution is not advisable if there has been a significant deterioration in the company’s financial position after the end of the financial year. In such situations, management and shareholders must act with the diligence of a prudent businessperson.
Distribution of Profit Among Shareholders
Profit is generally distributed in proportion to ownership shares in the company’s share capital. However, the articles of association may provide for a different distribution.
Therefore, before making a decision, it is important to verify compliance with the articles of association in order to avoid legal and tax risks.
Loss Coverage
If the company incurred a loss in 2025, a decision on how to cover it must be made.
Loss is most commonly covered from:
- retained earnings from previous years,
- reserves,
- capital reserves.
If such sources are not available, the loss is carried forward to future periods and covered from future business results.
In practice, a common solution is for shareholders to convert their claims (e.g., loans granted to the company) into capital reserves, thereby strengthening the company’s capital position and enabling loss coverage.
Tax Aspects of Profit Distribution
Profit distribution to individuals is subject to personal income tax on capital at a rate of 12% (for profits generated from 2012 onwards).
In addition, it is important to:
- execute the payment to the shareholder’s account,
- submit the JOPPD form in a timely manner,
- correctly calculate and pay the tax.
In the case of cross-border payments, the application of double taxation treaties must also be considered.
Advance Profit Distribution – Use with Caution
A company may also distribute advance profit, but only if financial indicators justify it.
If it later turns out that the actual profit is insufficient to cover the distributed advance, the difference may have unfavorable tax treatment. Therefore, advance profit distribution requires additional attention and analysis before making a decision.
Conclusion
Decisions on profit allocation and loss coverage for 2025 have a long-term impact on the company’s operations. A proper approach includes not only compliance with regulations, but also strategic thinking about the company’s future development.
If you are unsure which option is most suitable for your company or wish to assess the tax and accounting implications of a planned distribution, feel free to contact us. CONEO Croatia is at your disposal for all questions and support.
