Major Revision to PRC Company Law Moving Forward
February 25th, 2005An amended version of the PRC Company Law is now being circulated to “concerned departments” for comment, according to this article (in Chinese).
The draft has been developed through the State Council’s Legislative Affairs Office. Reportedly it will modify 120 separate articles (and more than 400 provisions) of the current law.
The PRC Company Law has been in force since 1995. It’s been amended before, but in only minor ways.
The article begins by exclaiming that “an individual will be able to establish a limited liability company with only RMB 5,000 in registered capital!”
It will be progress if they allow a single individual to incorporate a firm, and dropping the registered capital requirement to RMB 5,000 should enable a lot more people to register a company.
Still, I don’t understand the benefit of keeping a registered capital requirement. If enacted as described, this will be a dramatic reduction in the minimum capital required to form an LLC. If they are willing to reduce it so dramatically why do they need to retain it at all?
It takes about $50 to register a company in the U.S. (where incomes are much higher). RMB 5,000 (about USD 600) to found a company in China is still a significant amount.
Second, I don’t think registered capital has been effective in protecting either creditors or tort victims in China.
Protection against nefarious “pibao gongsi” or briefcase companies can come from 1) the market discipline of business reputations 2) enforced fraud laws, including criminal provisions and private rights of actions in civil proceedings and 3) third-party credit reporting agencies. Making somebody scrape together a certain amount of money and deposit it in a bank account long enough for some regulator to verify it’s there–with no requirement that it stay there after the business license has been issued–makes registered capital a silly game. At least under this proposed amendment it will be a cheaper game to play.