In our previous blog, we explained “legal representative” of a company in China, now let’s explain the concept of “ registered capital” and related legal provisions.
According to Company Law of PRC, registered capital is the fund all the shareholders contribute or promise to contribute to the company as they apply with local Administration of Industry and Commerce (“ AIC” ) for incorporation of the company. They shall declare the company’s registered capital in the Articles of Association of the company (which shall be submitted to the local AIC for review) and the amount of the registered capital will be showed in the company’s business license, as it’s an information open to public.
Furthermore, if the shareholders decide to increase or reduce the registered capital of a company, they also have to file the change of registered capital with local AIC and their business license shall be changed accordingly.
Generally speaking, registered capital of a company shows the fund strength or capacity of a company to certain extent, which could be used as reference for other company to choose their cooperative partner or for bank to evaluate if or not they will grant a loan application.
And for some industries, there are a minimum requirement for registered capital for the company to enter into this industry. For example, if you want to set up a labor dispatch company, the registered capital has to be at least 2 million RMB. Registered capital will also be used to grant qualification in some industries and also an evaluate standard in bidding for projects.
However, it doesn’t mean that the more registered capital the shareholder declare, the better. Though there is no time limit for fund injection and no requirement for an audit for fund injection now. Why so? Because registered capital means not only the capacity of the company, but also the liability to public, especially to creditors.
For example, if a company claimed they have 1 million RMB as registered capital, then they are expected to be responsible to their debt as much as 1 million RMB， even if the shareholder only injected 50 thousands RMB.
And in the other hand, registered capital is just one of the evaluate standards for judging a company’s capacity, as it’s often found that some companies with a huge registered capital actually has no asset at all. So it’s important to understand that it’s better to declare the registered capital as the actual capacity and financial situation of the company, otherwise, the shareholder will be exposed to some unexpected risk.
Related provisions in Company Law of PRC:
Article 26
The registered capital of a limited liability company shall be the amount of
capital contribution subscribed to by all shareholders as registered with the
relevant company registration authority.
The provisions otherwise prescribed by laws, administrative regulations and the
decisions of the State Council on the actual payment of registered capital and
the minimum registered capital of a limited liability company shall
prevail.
Article 198 Where, in violation of this Law, a company has been registered by false reporting of the registered capital, submission of false materials, or concealment of any important fact by other fraudulent means, the company registration authority concerned shall order correction to be made. Where a company falsely reports its registered capital, a fine of not less than five percent but not more than 15 percent of the falsely-reported registered capital shall be imposed. Where a company submits false materials or conceals any important facts by other fraudulent means, a fine of not less than RMB 50,000 but not more than RMB 500,000 shall be imposed. Under grave circumstances, the company shall be deregistered or its business license shall be revoked.
