Monday, November 04, 2013

Changes in Company Law in China From the Chinese State Council

(Pix: Li liqiang chaired State Council Executive meeting on Oct 25 promoting small business investment and lowering investment cost.

 China has been increasingly active in global conversations about corporate governance. (e.g., China-OECD Co-operation in Corporate Governance 2012).  It should come as little surprize, then, that China ids slowly  transposing customs and standards form global markets into its own context so that it might more effectively engage in global commerce. Shan Gao, and SJD candidate at Pennsylvania State University, has provided a short discussion of recent changes to Chinese corporate governance announced recently by the Chinese State Council.

Set up a LLC in China without paying a penny? Not yet: Chinese State Council’s company registered capital registration system reform
Shan Gao

China’s authority is trying to create a more business friendly environment for small business investors and owners. However, besides the administration, there are more to be done with the participation of legislature and bank industry.

What it is about?

On October 25, Chinese Premier Li keqiang hosted State Council’s executive meeting that promote multiple business regulation reforms.[1]

The first one is LLC registration reform. Minimum registered capital for LLC is removed. Many media reads this as no requirements on minimum registered capital. Requirements on shareholders’ first contribution and the deadline of paying full amount of register capital are also removed.

The second reform is: replace business inspection system with annual reports. Individuals could require company provide such annual reports.

Third reform: rules regarding the domicile of business will be reserved for local government.

Fourth: establishing company credibility information sharing system with electronic online license management capability. Violation of company law or other business regulation could create bad credit for business owner under such system. The system can create black lists and open to the public.

What to expect

Several articles under current Company Law of the People’s Republic of China had clear and restrictive rules on the company’s capital registration. Legally and Constitutionally, State Council’s new reform cannot be fully employed before legislature’s revision on current Company Law. Thus, in order to make reform works, the first thing is to have a new Company Law passed by People’s Congress and include all these new reforms.

Basically, to set up a LLC, shareholders must make a contribution of minimal RMB. 30,000 (USD. 4925.88) and such first contribution must be more than 20% of the registered capital. In other words, shareholders of any LLC registered capital less than RMB. 100,000 (USD. 16419.60) must make the first contribution of RMB. 30,000. If the LLC had registered capital more than RMB. 100,000, after the first contribution (more than RMB. 30,000) they could pay the remaining registered capital within two years from the date of establishment of the company (In practice, this date is the date when registration authority issue business license). For investment companies, the shareholders could pay the remaining capital within 5 years.

China’s company law also allows people to set up one-person limited liability company. Comparing with regular LLC, the law is more restrictive. The shareholder must pay full amount of minimum RMB. 10,000 (USD. 16419.60) when he applying for business license. China’s company law also specified the rules regarding the payment of the capital. Law allows non-monetary property to be used as contribution. However, the catch is all shareholders’ monetary contribution must be at least more than 30% of registered capital. This rule also applies to one person LLC.

Below I cite and highlight relevant articles that specify the capital requirement for registering a LLC:

Article 26 provides that:

The registered capital of a limited liability company shall be the total amount of capital contributions subscribed for by all the shareholders as registered with the relevant company registration authority. The aggregate amount of the first capital contribution made by all the shareholders of the company shall not be less than 20 percent of the registered capital, nor shall it be less than the statutory minimum amount of the registered capital. The remaining capital contributions shall be paid up in full by the shareholders within two years from the date of establishment of the company, or may be paid up in full within five years in the case of an investment company.

The minimum amount of the registered capital of a limited liability company shall be RMB 30,000, unless a higher minimum amount of the registered capital of a limited liability company is specified in laws or administrative regulations.

Article 59 provided that:

The minimum amount of the registered capital of a one-person limited liability company shall be RMB 100,000. The shareholder shall pay up the capital contribution specified in the articles of association in one lump sum.
One natural person can only establish one one-person limited liability company which is prohibited from investing in the establishment of another one-person limited liability company.

Article 27 provided that:

A shareholder may make capital contributions in the form of monetary funds, or alternatively may make capital contributions with such valuated non-monetary property as physical items, intellectual property rights, and land-use rights that may be valued in monetary terms and may be transferred in accordance with the law, excluding the property that shall not be used for capital contributions as specified in laws and administrative regulations.
The non-monetary property that is used for capital contributions shall be valued and verified, and shall not be over-valued or under-valued. The provisions on the valuation of such property as prescribed by laws or administrative regulations shall prevail.
The aggregate amount of monetary capital contributions by all the shareholders shall not be less than 30 percent of the registered capital in the case of a limited liability company.

As you can read from the rules I cited here, Company Law is very clear on the requirement of capital for shareholders. Violation of these rules could cause civil liabilities and even criminal liabilities under certain circumstances. State Council’s new reform of relaxing the rules on minimal registered capital designed to create a more business friendly environment for investors. To fully archive this, the first thing is to gain support from legislature. State Council’s reform fundamentally changed the Company Law, the reform can’t realize without People’s Congress passing new Company Law to remove those conflict rules on registered capital. In other words, we could expecting a new bill or amendment for China’s Company Law.

The reform design to create a more business friendly environment for small investors and businessman, however, liberalize registered capital requirement may not enough. As some media had already raised that current banking service is not small-business friendly enough. [2] For example, some banks would not accept business account or corporate account application for small business owners whose registered capital is less than RMB.500, 000 ($ 82,098) or RMB. 1,000,000 ($164,196). Without corporate account from the bank means small business owner cannot obtain tax registration certificate and business invoices. As one editor clearly argued: “Currently, there are no laws that regulating the banks’ discrimination on small business investors. Without bank industry’s support, the relaxation on the LLC registered capital is not complete.”

[1]李克强推公司登记改革 取消注册公司资金限制

[2]取消注册资本 小公司仍难跨银行“高门槛”

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