What is the difference between Registered Capital and Paid-In Capital in Chinese companies?
Committed Registered Capital is the amount of capital committed by shareholders.
Paid-In Capital, on the other hand, is the amount of capital actually contributed to the company by shareholders.
Under Chinese corporate law, 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.
What does this mean for North American companies doing business in China?
The capital actually paid by the shareholders can be more relevant when determining a company’s ability to pay off debt. However, it is also risky to evaluate a company just based on the registered capital shown on the business certificate.
A credible business partner is key to doing business in China. However, finding information about Chinese manufacturers, suppliers, distributors, or companies is difficult for North American businesses without professional help.
To minimize legal and financial risk, companies doing business in China must take steps before signing an agreement or engaging with a Chinese business partner to ensure that it is financially solvent and able to fulfil its financial obligations.
Identify any legal, financial, or intellectual property risks before going into business with a Chinese partner.
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