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Dec 3, 2011

Registered Capital Needed for Entering the Chinese Market?

This is the number one question that we receive from the most risk averse of our clients that wish to start a Wholly Foreign Owned Enterprise/Entity (WFOE).  The answer is not as simple as me writing a figure down below.

Revisions to Chinese Company Law has liberalized the minimum amount necessary to, in theory, start a business in China. The minimum "theoretical" amount is a trivial amount in most industries.  However, the local government has threshold amounts that are often utilized as true minimums.  The necessary amount, thus, will depend on the industry, locale and hopefully your proactive counsels interactions with the local authorities.

The registered capital of a company includes transferred IP, company assets, and start-up cash.  The registered capital amount can be found by anyone with a computer.  For large amounts (discretionary on part of government) of registered capital the amount can, normally be, remitted over a period of a couple of years.  For smaller amounts, the amount must be contributed to the company's account immediately.

A few issues to consider:

1.  Don't begin to value your IP, company assets or structure deals before discussing the matter with your counsel and having them contact the local government.  If your counsel is not proactive, they will not contact the local government - run quickly to another counsel. I had a client that used one of the "leading law firms in China" that didn't discuss with the government the transferred asset value that, in the eyes of the client, was valued at over USD 450,000, but that was only worth, in the eyes of the local government - USD 50,000.  A proactive approach would have allowed a higher sum to be placed on the asset. This led to the company forwarding an unexpected large amount of money into China
at a time when the amount was needed for a capital investment in the states (replacement of the asset being sent to China).

2.  The registered capital is public information.  Many of the more careful of Chinese (and WFOEs in China) companies will not do business with companies with low registered capital.  Many Chinese companies know that they are, in most cases, only going to be able to attach the registered capital of the company if things go awry and the "foreign" company will likely close shop and be nowhere to be found when the proverbial horse excrement hits the fan.

3.   It is true, that in most cases, liability is limited to the registered capital.  However, don't forget exit bans, the criminal "justice" system and the local police.  Legal wind-up is essential.
See my article: Winding-up/Shutting Down a Company in China.

4.   Playing with the books in order to show that the company is capitalized is a criminal offense that can land you in an unwelcoming jail.  We have seen this situation and we hate visiting people in jail, thus, don't play this game. 

5.  Starting a company in China is more expensive than starting a company in the West, since often leases are pre-paid, many areas require "good-will" money in advance of leasing, a capital reserve is often required prior to hiring a significant number of employees and many vendors require pre-payment. 

6.   If the local government quotes you a ridiculously high number in the eyes of your lawyer in China, then, likely the government believes your involved in a scam, the venture is not feasible or the venture is of a nature that is inherently dangerous to workers, the environment or the reputation of the local government.

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SeanHayes@ipglegal.com