Another good post by Dan Harris on the nuts and bolts of China corporate law, in this case the concept of registered capital. In addition to Dan’s comments and the ones he links to at China Briefing, both of which are definitely worth a read, I would add a couple of things.

First, and slightly tongue in cheek, the issue of registered capital is not in fact the most difficult thing to discuss with foreign investors. It used to be, but has now fallen to #2 on the awkward explanation chart. Registered capital was supplanted by the “Supervisor” requirement that came out of the new Company Law and has been, in my thinking anyway,  incorrectly applied to FIEs, particularly WFOEs. Try to explain to a client why his 100% subsidiary needs an additional executive position whose job it is to be a weird kind of watchdog on behalf of the “shareholders” - not easy.

Second, the “You get what you pay for” rule definitely applies. It’s all a matter of risk. These days, you can go to an incorporation agent and get your WFOE set up for . . . wait for it . . . a few thousand RMB (really). Depending on the complexity of the venture, the quality of the agent, and particularly the experience of the folks setting up the business, you might come out OK. On the other hand, you might end up liquidating in a few months, having your business license revoked, or being thrown in jail. Hard to tell with these things, you know.

I’ve known many expats with a wealth of China experience who, at some point, decide to go into business for themselves over here. Some have so much experience that one of these cheapo agents works just dandy since the expat can do most of the incorporation work himself anyway. These situations are rare, however. More than likely, there is an issue related to real estate, tax, intellectual property, equipment import, etc. that makes the investor pause, reflect, and then seek legal counsel. Usually a wise decision, and if the venture is indeed a simple one, the legal fees are probably not going to be too onerous.

Third, registered capital. I can’t remember how many times a client of mine has equated the statutory “minimum registered capital” with the minimum amount he will have to pay in to incorporate the venture. Not true, as Dan correctly points out. Minimum registered capital is a statutory term unrelated to any single business and really should not be used as a guide for anything.

Decisions on registered capital are generally made by the local MOC folks, and the number they ask for will be related to startup and operating costs. Good lawyers, and even most agents, will be able to tell you roughly how much the local MOC is going to require; if a business plan (specifically the Feasibility Study) is not just a piece of fiction but has real numbers, then the registered capital amount specified by the investor in the incorporation documents will actually make sense and be approved by MOC.

Years ago when minimum registered capital for an FIE was in the USD $350,000 range, that number meant a lot. But these days the number is around 12K. The number of firms that can start up and operate for several months on less than 12 grand is quite limited, mostly the one or two guy consultancies that just need a way to collect RMB.

One would hope that Dan’s loyal readers understand that he is not just blowing smoke on this issue. Yes, practicing lawyers can be biased on these things, but in this case, this is no joke. I know of investors that have gleefully started up FIEs with very low registered capital amounts just to blow through it in six months and get stuck with a capitalization crisis.

There are ways around this, of course, either by planning ahead on registered capital or specifying some additional optional funding from institutional or parent company loans. If all else fails, you have to ask the government to increase your registered capital, an approval process that cannot be done overnight. For the law wonks out there, registered capital plus such institutional or parent company lending equals another term of art called “total investment” that is also spelled out in the incorporation documents, and also very hard to explain to investors.

Isn’t this fun stuff? Makes you want to run out and become a corporate lawyer, huh? Just be glad I did not write down the statutory table used for calculating allowable total investment using a given registered capital - sometimes you gotta use a calculator for that, which is scary. I think I’ve said too much.

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