Registered Capital vs. Paid-In Capital
Tags: Capital, Credibility, Doing Business in China, Due Diligence, SMBs and SMEs
The author’s most recent article China registered capital, fully explained
What exactly is registered capital?The Registered Capital is also called the ‘committed registered capital’, which is the amount of capital committed by shareholders.
What is paid-in capital?Paid-In Capital (also referred to as ‘paid-up’ capital), is the amount of capital that shareholders actually contributed to the company.
What is the difference between registered capital and paid-in capital?Under the Company Law of China, companies use a subscription system for each shareholder’s capital contribution. It is legal for shareholders to pay the committed capital long after the company’s formation, sometimes even decades after incorporation, as long as it is allowed under the company’s Articles. As a result, it is possible for a shell company without any assets to have USD $5 million in registered capital but $0 in paid-in capital. This should be a red flag to North American companies, as it indicates that the company may not be able to meet its financial obligations, pay for its order of products, or deliver on its supply contracts.
Can paid-in capital help you determine a Chinese company’s credibility?It can be tricky. The capital actually paid by the shareholders can be more relevant when determining a company’s ability to pay off debt. However, it is risky to evaluate a company just based on the registered capital shown on the business certificate. A credible business partner is crucial to your business’s success. However, finding information about Chinese OEM manufacturers, suppliers, distributors, or companies can be challenging for North American businesses without professional help. To minimize legal and financial risk, companies doing business in China must take action before signing an agreement. Engage with a business law professional in China to ensure that your Chinese business partner is financially solvent and able to fulfil its financial obligations.
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Jenny (Hongli) SunTrustiics vetted lawyer & Partner at T&C Law Firm