Welcome back to our Entity Essentials Series, where we highlight key points to consider before setting up an entity in China.
This article focuses on recent changes to China’s Company Law that impact registered capital. The 2024 Company Law now requires full payment of the registered capital subscribed by the shareholders within a five-year period.
Let’s explore what this means.
What is Registered Capital?
In China, registered capital is the amount a company declares when registering as a business. It’s the initial investment shareholders or investors contribute to start and run operations. This money finances early operations and serves as a guarantee to creditors of financial stability.
When opening a limited liability company in China, the registered capital is the limit of the company’s liability exposure. For example, if the registered capital is set at 100,000 yuan ($17,000), then 100,000 yuan is the limit of liability for the company.
How Does this Work in Practice?
If a company gets into a dispute with a worker or another company and loses, resulting in a lawsuit for 200,000 yuan — about double the registered capital amount — the company could declare bankruptcy. However, registered capital is the amount shareholders pledge to the company, giving it credibility.
Therefore, if sued for 200,000 yuan and the company lacks funds, the prosecutor could go after shareholders for the registered capital amount.
Why is this Important?
When setting up a company, you can choose the registered capital amount, but you do not need to invest that full amount into the company at that point.
However, you are committing to investing that amount at some point in the future. Previously, you had 20 years to make these contributions, but under the new rules, this has changed to 5 years.
Why Would You Put a Higher Registered Capital?
The required registered capital depends on the type of business planned in China – it’s about establishing credibility in the market and protecting customers and suppliers from risky companies. For new companies, startup capital is needed to maintain operations before getting paid by customers. But in some industries, a certain registered capital amount is mandatory. Here are some examples where it’s important:
- If you want to run an international logistics company, the registered capital should be:
- Road logistics: 2 million yuan
- Air logistics: 3 million yuan
- Sea logistics: 5 million yuan
- If you want to exhibit at the Canton Fair – as Kinyu did in 2023 – companies need 300,000 yuan in registered capital.
- Employees may view registered capital as an indicator of a company’s stability before accepting job offers.
How Will the New Law Affect My Sourcing Office in China?
The new company law essentially states that whatever registered capital amount is chosen must be paid into the company within five years. So if a high registered capital is desired to attract talent, exhibit at the Canton Fair, or carry out logistics services, shareholders must ensure they have the cash to back this up and pay in the full capital within the five-year period.
How Can The China Desk Help?
At Kinyu, we recognize committing and paying a certain registered capital amount to a Chinese entity that’s essentially a department of your company can be a pain point.
The China Desk at Kinyu is an industry-focused Employer of Record with a high registered capital, and a strong manufacturing and supply chain services track record.
With The China Desk, you can hire your China employees through our platform so they are secure with the tools to excel, without the headache of entity admin.
If you have an entity set up and want to close it, check out our free download on how The China Desk can support this process.
If you’re hiring on the ground for the first time and unsure about setting up an entity, check out our Salary Calculator or read a case study.
