Minimum registered capital: How much is too low?
It’s the time of year when everyone starts to filter back to China again after the summer break and also the time when new-to-China “consultants,” “lawyers” and generally enthusiastic small investors start to emerge. Having a glass of ASC’s very fine imported Beringer Shiraz at Centro last night, it amazed me to hear several comments from other expats about the “great deals” and “cheap investments” that one can make in China. One bloke had tapped up his parents for a few dollars to set up a coffee shop. “The registered capital is only RMB100,000 (about US$13,000),” he stated.
These people are dreaming, and it’s an issue that at Dezan Shira & Associates we have to deal with time and time again. Here’s the real deal with registered capital.
Registered capital is supposed to be a guideline, it is not enshrined in Chinese FIE regulations. It was originally in place to ensure FIEs indeed had enough capital to sustain a business, not to be a type of “sales pitch” to show how cheap it is to invest in China, which is what it has now become.
It should actually be calculated on the amount the new business needs to inject to sustain it until it can generate enough revenues from its own cash flow in China. If you do not do this, this is what happens:
- You run out of money. That requires a cash injection, and cannot be put in from China generated funds (it’s a foreign investment, remember). If you transfer money if from overseas but do not go through the process of re-registering your registered capital, through the correct processes, (which take about 6 weeks and involves a new business license being issued) then that amount counts as income and is subjected to business and profits tax (which registered capital is not).
- Many businesses underestimate the amount required up front in their operational cash flow. Take for example just two scenarios:
- Imported equipment for use in the facility. Duty is now payable on full on this upon importation, and then repaid back at 20 percent per annum for five years. But you need to have the amount ready up front as a cash flow expense. It’s often missed meaning you have to go back to your head office and ask for additional money.
- VAT payer status. Depending upon your first year expected turnover, and especially for a small business (small VAT payer status), customs now expect you to remit the entire VAT bill on your 1st years imports in one go, up front. Again, if you haven’t expected that you’ll have to go back to HO and ask for it.
The under appreciation of upfront cash flow needs has seen many a business go very quickly to the wall when if they had known about it possibly they would have thought twice about the investment or would ensured additional funding was available. I also wonder how many businesses are aware that registered capital is equal to their limited liability status in China and that there are issues to address with this also?
There are just a handful of issues affecting the calculation of registered capital. At Dezan Shira & Associates, we always go through with our clients their operational costs and the implications of their investment as it is this essential need that dictates the registered capital amount. A few then tell us, “so and so told us we only need RMB100,000.” Don’t take our advice, assume we are expensive, and don’t use our services. But it’s simple economics – you can’t run a business in China on fresh air, and those that try, become very rapidly insolvent. They are not the sort of clients we would want, although I do feel a little sorry for their naievity.
Cheap consultants that do not understand what they are doing, or the implications of their clients registered capital status, are dangerous. Insolvency is not a pleasant experience when you have staff to pay. Cheap lawyers and China consultants, recommending RMB100,000 investments, are interested in securing their fees to stay in business, not the clients long term well-being. There is a huge difference in professionalism. Because even in China, you cannot escape basic economics. You either have the money to run your business, or you do not.
For those of you out there looking at opening businesses in China on the cheap – please look beyond the ‘minimum registered capital amount’. Business is a professional occupation and you need to look at it in a professional light – and truly work out the amount of cashflow you require. Basic economics always has a habit of winning out over investor naiveity.