What’s New in China’s Company Law—and Why It Matters
China has recently overhauled its Company Law, with major revisions taking effect on July 1, 2024. These changes impact everything from capital contributions to corporate governance and could reshape how small and medium-sized enterprises (SMEs) structure and manage their China operations.
Here’s a practical guide to help you understand the updates—without the legal jargon.
Back to the Future with Capital Contributions
Imagine playing a strategic board game where the rules have suddenly changed. The new law brings back some old rules but with a modern twist. Previously, China relaxed its capital contribution requirements, allowing businesses more flexibility. Now, it's tightening these rules again. Businesses must fully contribute their registered capital within five years (although a transition period is expected from the implementation rules to be issued by the PRC State Council), a shift back to stricter financial commitments. It's like being told to complete your Monopoly game within a set time—ready, set, go!
Transparency is the New Game
In a move towards transparency, the law now requires businesses to publicize the capital contributions of each shareholder. Think of it as updating your status on social media, but instead of sharing what you had for lunch, you're sharing how much each partner has invested in the business. This move aims to make it easier for others to understand the financial health of your company.
Directors: The New Referees
Directors are given more power and responsibility under the new law, ensuring that shareholders meet their capital contribution commitments. If a shareholder falls short, directors are now the referees who call out the foul play. It's an expanding power and increasing duty for the directors; they need to actively ensure the game is played by the rules.
Legal Representative: More Flexibility
The revised law allows greater flexibility in appointing the legal representative. Previously, this role had to be the chairman of the board or the executive director. Now, any director or manager who represents the company can take on this role—giving companies more autonomy in assigning internal responsibilities.
No More Supervisors? Simplified Governance
Under the new law, the board of supervisors (or individual supervisor) is no longer mandatory—provided shareholders unanimously agree to forgo it. This is particularly beneficial for small businesses or closely held companies, streamlining the governance structure.
However, for companies with over 300 employees, you’ll need either a supervisory board or an employee representative on the board of directors—so this simplification isn’t universal.
What Happens If You Don’t Comply?
Failing to follow the new capital contribution rules can lead to significant liabilities. If a shareholder doesn't meet their financial obligations:
- They may face fines or enforcement actions
- The company might be forced to cancel the unfulfilled equity interest
- Directors may also face liability for failing to enforce compliance
In short: not playing by the new rules has real consequences.
Be Strategic with Capital Contributions
The changes urge businesses to take a more strategic approach when setting or revising registered capital. It's not just about how much you plan to contribute, but how and when you do so.
If your company has already committed to a large registered capital amount that may not be feasible within five years, consider implementing a capital reduction process now to avoid future liability.
Be Careful of Capital Contribution in Acquisition
If you are planning to acquire an existing company rather than starting a new one, be careful if the transferring shareholder fails to make the contributions within the time limit set out in the company's articles of association, or if the actual value of the non-monetary assets contributed is significantly less than the shareholder’s subscribed capital. Otherwise, you will be jointly and severally liable for the shortfall in contributions, unless you do not know or should not have known of the aforementioned circumstances.
Be Cautious When Acquiring a Company
If you’re acquiring an existing Chinese company, conduct due diligence on capital contribution history. If the outgoing shareholder has failed to meet their capital contribution or contributed assets below their claimed value, you may be held jointly and severally liable—unless you can prove you had no knowledge of the issue.
Plan Ahead and Protect Your Business
These legal reforms require a closer look at how your company is structured and managed. For small businesses, the key takeaways include:
- Aligning your capital plan with real operational needs
- Strengthening internal compliance
- Keeping clear documentation of shareholder activities
And remember: once incorporated, your company is a separate legal entity—not a personal extension of its owner. As poet Kahlil Gibran wrote, "Your children are not your children." The same applies to your company: it must be treated as distinct from your personal finances and obligations.
How Trustiics Can Help
Through Trustiics, you can access vetted, experienced lawyers in China without leaving your office—anywhere in the world. Your selected lawyer can support you with:
- Reviewing your company’s capital structure and updating registration documents to comply with the new Company Law
- Reducing registered capital amounts through a compliant process to limit future liabilities
- Legal due diligence and documentation support for acquisitions and share transfers
- Drafting and updating board resolutions, shareholder agreements, and governance documents under the new legal framework
You can get started by selecting a lawyer, sending a request that describes your needs, and receiving a free, no-obligation quote. Once approved, you make a secure online payment held in escrow until the service is completed.
Alternatively, contact us at support@trustiics.com, and our support team will coordinate the legal services you need to keep your business compliant and future-ready in China.