Registered Capital is an integral part of establishing a company and subsequent filings in China, whether its domestically owned or whether it’s a Wholly Foreign Owned Entity (WFOE). Each company has to disclose it on its Business License, a proof of company existence and the ability to trade legally.
So…“Registered Capital” is often the foremost tangible, and some would say, reliable financial figure that is available to third parties in their due-diligence.
But what does Registered Capital actually mean? There are numerous expressions explaining capital:
Authorised Capital – maximum amount of the capital for which shares can be issued by the company to shareholders.
Issued capital – share capital that has been issued to shareholders.
Paid Up Capital – the amount of money a company has received from shareholders in exchange for shares, at par value.
In China, the Registered Capital is akin to Issued Capital. However, the country currently implements a subscription registration system and a company’s Shareholders are not required to pay up the full capital provisions before they obtain their Business License.
In terms of complying with domestic law, so long as the shareholders pay over the capital funds (can be currency, fixed assets, intellectual property, land use rights, copyrights, trademark rights etc) within the time specified in the Company’s Articles of Association as agreed and decided by the shareholders/sponsors, then the company is in full compliance. However, our correspondents in China advise that it generally means 10-20 years, even up-to 50 years can elapse before the capital is actually paid in.
To outsiders undertaking due-diligence, with little information to rely on about the financial resources of a company, this understanding of what is being analysed is crucial. Bottom line – just because a company has an impressive registered capital it doesn’t mean it’s adequately capitalized.