China Company Verification and Due Diligence: Registered Capital/ Paid-in Capital
A Chinese company with larger registered capital, especially paid-in capital, usually has a larger scale and stronger ability to perform contracts. However, its registered capital or paid-in capital isn’t necessarily equal to its actual assets at a certain point.
Therefore, registered capital and paid-in capital are only of limited reference value for you to determine a Chinese company’s ability to perform contracts.
1. What is the Company’s Capital?
The registered capital is the amount of capital that the shareholders of a Chinese company commit to contributing to the company.
The shareholders are only required to pay such amount of capital contributions, or the amount of subscribed capital contributions to the company within the committed period. The amount of capital that has been contributed to the company is called paid-in capital.
Shareholders of most Chinese companies do not actually make the capital contributions, but only promise to do so until the company is deregistered. As a result, the company usually does not have so much capital from the shareholders on its books.
However, in the case of a factory, since funds are needed to purchase equipment, premises, and raw materials, its shareholders will usually actually make their committed capital contributions. Moreover, such a company has relatively large registered capital.
2. Why does the Company’s Capital matter?
(1) The larger its paid-in capital, the stronger its ability to perform.
Generally, if the shareholders have made large capital contributions to the company, the company will have sufficient capital for its operations. The capital is either converted into assets or into a business reputation. These will facilitate the performance of the contract with you.
Of course, the paid-in capital isn’t equal to the amount of cash or assets on the company’s books at the moment. The capital may have been used for the company’s operation, or for purchasing assets that have been significantly depreciated.
Therefore, you shouldn’t rely entirely on it to determine a company’s ability to perform contracts, but you can use it as a valuable indicator.
(2) The company’s shareholders will likely pay you for the company’s debts.
For example, a shareholder may fail to actually make the capital contribution or fail to make the capital contribution in full after subscribing to a certain amount of capital contribution.
At this point, if the company’s assets are insufficient to repay your debts, under certain circumstances, you may ask such shareholder to repay your debts for the company to the extent of the amount of his/her subscribed but unpaid capital contribution.
By the way, we also discussed how to claim against a company’s shareholders in ‘What Happens to My Debts When a Chinese Company Is Dissolved or Goes Bankruptcy?.
3. How to find the Company’s Capital?
You can check the Company’s Capital in China’s National Enterprise Credit Information Publicity System.
This is a website of the State Administration for Market Regulation of China, available at: http://www.gsxt.gov.cn/index.html
For how to use the website, please read ‘How Do I Know if a Chinese Company Is Legitimate and Verify It?’
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