Registered capital is required for both locally-owned Chinese companies and "WFOEs" (Wholly-Foreign Owned Enterprises) to establish and operate a company in China. Unlike the past, there is now no statutory requirement for a minimum amount of registered capital (except in specific industries).
Companies are required to disclose their registered capital amounts publicly, and it is used as one item for due diligence by third parties to confirm the company's capacity for conducting business with others. A registered capital is set at the time of the creation of the company, but can also be easily increased later.
The registered capital represents the company's capacity to carry out its basic activities when establishing a company. For example, the initial salaries to be paid to the company's employees, the company's fixtures to purchase or lease, and the equipment are covered from the authorized capital. In short, registered capital is used to cover other costs, including initial and operational costs that will arise later.
Basic Characteristics of Registered Capital
The registered capital of a company in China is declared in its Articles of Association and on its Business License. The authorized capital is also included in other operating licenses of the company. And as mentioned, the authorized capital of all companies is registered in a public database.
The amount of registered capital is a useful indicator of a company's financial strength, but it should not be considered a proxy for the valuation of a company as many intangible factors are not reflected there such as the goodwill and strength of a company's brand as it develops over time.
The registered capital of a company in China is also not limited to cash contributions only. Companies can contribute phystical assets such their equipment or intellectual property rights in the registered capital. However, these types of property contribations to registered capital are generally not used due to complications of having to value these assets properly.
What is the Minimum Registered Capital?
In China, there is no minimum registered capital limit for the registered capital of companies. However, some sectors are excluded from this condition. For example, banks and other financial institutions would have some of the highest minimum registered capital requirements.
The amount of registered capital can be more important for other reasons as well. For example, the capital amount of a WFOE has a decisive role in determining the maximum number of foreign employees allowed to work in WFOEs. In addition, a large amount of registered capital offers companies advantages such as tax incentives. While there is no minimum capital requirement for WFOEs and JVs in China, the Ministry of Commerce and local branches require that the total investment and therefore registered capital, of these entities be commensurate with the business planned.
Liability for Unpaid Registered Capital
While there is no longer a hard timeline for a company's shareholders to actually inject capital up to the registered capital amount, you should still set a registered capital amount carefully. When a company faces financial difficulties, its shareholders will remain liable to third party creditors for up to any amount of registered capital that has not yet been contributed. This is to prevent the problem of third parties relying on your registered capital amount when doing due diligence and is one rare instance of "piercing the corporate veil" to allow liability to pass on to a company's shareholders.
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