No. Basic bookkeeping. Equity = Assets - Liabilities. Assets can be "cash in a bank account", tangible stuff you buy to your company, intangible things (product you are building, ip, patents, etc). The "below 2500" rule kicks in as a safeguard when your equity (assets-liabilities) have dropped below 2500, to avoid approaching 0 "soon".

Yes. If your balance at the end of the year isn't half of your starting capital, you need to tell estonian government officials how you are planning to recover from this horrible failure. I didn't know this on my first year and we just made a small investment at the end of the year that made the balance to drop at horrific 40% level which triggered alarms in the government. If you fail to satisfy them with your plan, (if I understood right estonian-only materials), they can declare your company bankrupt. I know it sounds ridiculous but welcome to Estonia I guess. Though I do doubt that the officials would close your business unless you actually go bankrupt but it's still a hassle and feels very controlling to explain your business to a government at this level.

I realize it’s annoying, but the requirement to register “lost” share capital is a common one in Europe.

Think of it as a warning flag to potential lenders. The default assumption in society is that limited liability corporations have enough assets that it’s safe to sell them something on credit, i.e. invoicing rather than cash. Forcing companies to register the fact that their equity is negative provides an easy way for vendors to look up this warning flag.

I’m not directly familiar with Estonian law, but I’ve run a couple of Finnish companies. If the law is similar, it’s not that the government registry would be actively filing for bankruptcy if you have negative equity, but it does create potential liability for board members if the company goes bankrupt and the board failed to register negative equity when the information was available to them.

This is a good point. However for me the annoyance is not about reporting the decrease, it's the fact that if capital drops below 50%, government is now in control whether they exercise that control or not. I would understand something like 10% but 50% is just ridiculous to me.

I think the confusion here might be "starting capital" vs "registered share capital". You should set the registered share capital to the minimum allowed 2500 eur. Even companies making hundreds of millions of euros in revenue set usually set it to 25000 eur. You can then invest any amount over that as your actual starting funds without increasing the registered share value.

That way the company is only required to own at least 2500 eur in assets, which should not be a problem for any serious business.

Solid advice. I was stupid enough to follow the process estonian gov had laid out and it really didn't make this distinction at any point so I registered our full capital as share capital.

If one didn't have this background knowledge, one might hesitate to enter a totally fictitious number on this form.

What's the fictitious number? You do need to show proof that you have the 2500 € in a bank account.

If the actual number is 100000, then 2500 seems fictitious?

The confusion here stems from the multiple meanings of the word "capital".

The logic is identical to for example founding a company in the UK: https://www.gov.uk/limited-company-formation/shareholders

You pick a "name value" and number of shares when founding, for example £1 x 500 shares. This is the "share capital", and official maximum liability of the founders for the company's debts. It also defines the smallest unit of ownership that can be assigned to a person. But of course the actual starting investment, assets, and the market value of the shares can be much higher.

Estonia doesn't use the concept of "number of shares out of total shares", but instead "euros of ownership out of total share capital". For a typical small business you would set it to 2500 EUR and can split ownership at 1/2500 granularity.

It's just a matter of how you want to structure the balance sheet.

You can have 2.5k€ share capital and 97.5k€ free capital. This is usually a better arrangement than having it all in the share capital which is "bound" equity. (Bound is probably not the right English word for this — I only know the terminology in Finnish.)

I agree, 50% seems arbitrary. Finnish law only requires registration of negative equity.

In practice the difference between 10% and 50% is only 1000 euros though, assuming your company is registered with the minimum required share capital of 2500 €.

No, it doesn't have to be cash in your bank account, as martkaru explained in the other comment.

I can start a company and declare a really expensive couch as it's assets in the balance and it would be ok.

This is not necessarily the case everywhere and for all legal forms. In Germany there's a "Unternehmergesellschaft" which only requires assets of 1 Euro. It is supposed to turn into a GmbH eventually by accumulating 25k in assets. However it is illegal to simply add an expensive couch as this would be a "verdeckte Sacheinlage" which I believe also exists elsewhere as "concealed/hidden contribution in kind" (IANAL)