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When dealing with a Chinese business, you may want to check its capital position to assess whether it can support its operations sustainably. In this background, it is important to understand the concept and market practice related to registered capital in China.
In China, however, when you look into a company’s capital, you will encounter two terms: registered capital and paid-in capital. Many people get confused about the distinctions between the two terms and wonder which one is more useful when determining a Chinese company’s capital status.
• Registered capital is the fund a company’s shareholders promise to contribute when they apply to the government authorities for company incorporation. It may not equal the capital amount actually injected into the company.
• Paid-in capital is the amount of capital injected into a company by its shareholders.
• When you do business with a Chinese company, it is important to verify whether it is a company with paid-in capital to support its operation or it is not as financially strong as it claims to be.
Everything about the China company’s Paid-in Capital
What is Registered Capital?
“Registered capital” refers to the fund a company’s shareholders promise to contribute when they apply to the government authorities for company incorporation.
Where to find such information?
You can find the registered capital in three places:
1) It is written in the Articles of Association (AOA) of the company;
2) It is on the business license of the company issued by the local authority;
3) You can search for it in the government public database such as the National Enterprise Credit Information Publicity System of China(government website, in Mandarin Chinese).
What are the legal requirements of the ‘registered capital’ in China?
1) Authorities require the registered capital for company incorporation
The Chinese government authorities require a specific number of registered capital for company incorporation in China. The registered capital cannot be zero RMB.
2) No requirement for a minimum amount (anything above zero RMB)
From the legal requirement, there is no minimum requirement for registered capital in China, except for companies in some particular industries (e.g., stock brokerage companies, commercial banks, insurance firms, etc.).
3) Difficult to be reduced after company incorporation
It is simple and easy to increase a company’s registered capital; but somewhat complicated to reduce its registered capital.
4) Can be paid in various forms other than cash
Registered capital can be paid by its shareholders in various forms, including currency, fixed assets, intellectual property, land use rights, etc. Yet, the currency contribution should be no less than 30% of the total amount of the registered capital.
Is registered capital a good indicator of a company’s capital position in China?
The answer is both yes and no. Here is why
When is registered capital a good indicator?
Registered capital’s essential function is to provide a ballpark figure to the government authorities on the company’s operation scale. Therefore, the registered capital indicates a company’s projection of its operation costs, at least for the following few years after incorporation.
Besides, the registered capital represents the maximum liability a company owes to its creditors. For example, if a company has RMB one million in registered capital, it is expected to be responsible for as much as RMB one million of its debt.
When it is not a good indicator?
China has adopted the “capital subscription system”, and a company’s shareholders can contribute their committed capital in years. The capital contribution schedule can be found in the company’s Articles of Association.
The amount of registered capital may not equal the capital injected into a company.
In extreme scenarios, a shell company can have millions of dollars in registered capital, but no capital has been injected into the company.
What is paid-in capital?
Unlike registered capital, paid-in capital in China is the amount of capital injected into a company by its shareholders.
Where do you find the paid-in capital of a company?
You can find a company’s paid-in capital in the National Enterprise Credit Information Publicity System of China or in the company’s annual reports.
Is paid-in capital a good indicator of a company’s capital position in China?
The paid-in capital reflects a company’s actual capital amount more precisely than the registered capital.
Considering the capital subscription system in China, a company with a large amount of registered capital does not necessarily mean the company is adequately capitalized. When researching a company’s capital in China, you will need to look at its paid-in capital in addition to the registered capital.
Besides, a significant discrepancy between a company’s paid-in capital and registered capital usually raises a red flag indicating potentially irregular company activities.
When dealing with a potential business partner in China, it is important to verify its capital position.
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Author: Jenny (Hongli) Sun
Partner at T&C Law Firm, Trustiics vetted lawyer