Compliance Series | China New Company Law Takes Effect!
On December 29, 2023, the Standing Committee of the 14th National People's Congress passed the revised "Company Law of the People's Republic of China" (hereinafter referred to as the new "Company Law") during its seventh session. Upon its release, the new Company Law sparked significant social attention and widespread discussion. As of July 1, 2024, the new Company Law has officially come into effect. Sinobravo has compiled key points from the perspective of company establishment under the new regulations for clients planning to register new companies in the near future.
Carefully Choose Your Company Name
Article 6 of the new Company Law states: "A company shall have its own name. The company name shall comply with national regulations. The right to the company name is protected by law." This new provision integrates Article 110, Paragraph 2 of the Civil Code, which states that "legal persons and unincorporated organizations enjoy the right to their names, reputations, and honors," and Article 4 of the Regulations on the Administration of Enterprise Name Registration, which states, "An enterprise may only register one enterprise name, and the enterprise name is protected by law." When drafting a name, companies should comply with these provisions to accurately reflect the nature, characteristics, and business scope of the company.
Select Your Legal Representative Wisely
The legal representative holds the most important position in a company. Article 10 of the new Company Law stipulates: "The legal representative of the company shall be the director or manager who executes the company's affairs in accordance with the company's articles of association." This provision expands the range of potential legal representatives from the chairman, executive director, or manager to "any director or manager who executes the company's affairs." This adjustment allows companies to choose the most suitable director to act as the legal representative, offering more flexibility and emphasizing the legal representative's active participation in corporate governance.
Set a Reasonable Registered Capital
For limited liability companies, the new Company Law introduces a significant change from a "full subscription system" to a "limited subscription system." Article 47 of the new Company Law states: "The amount of capital subscribed by all shareholders shall be paid in full within five years from the date of the company's establishment according to the provisions of the company's articles of association." Based on this change, companies should set a reasonable registered capital and funding plan based on their business model, operational needs, and shareholders' financial status. As the company grows, it can further increase its capital.
For joint-stock companies, Article 98 of the new Company Law states: "The promoters shall pay the full amount of the shares they have subscribed before the establishment of the company," adjusting the funding method to a paid-in system. This provision imposes stricter capital fulfillment obligations on promoters when establishing joint-stock companies.
More Options for Contribution Forms
Article 48 of the new Company Law stipulates: "Shareholders can contribute in currency or non-currency properties that can be monetarily valued and legally transferred, such as physical objects, intellectual property, land use rights, equity, and creditor's rights." This new provision includes equity and creditor's rights as forms of non-currency contributions, enhancing funding flexibility while also posing potential credit risks.
No Limit on the Number of Directors
Article 68 of the new Company Law stipulates: "The board of directors of a limited liability company shall have at least three members, and its members may include representatives of the company's employees," removing the previous cap of 13 directors. While theoretically, the number of directors can greatly expand, companies must arrange this prudently from an operational perspective.
Supervisors No Longer Mandatory
Article 69 of the new Company Law states: "A limited liability company may establish an audit committee within the board of directors composed of directors to exercise the supervisory functions stipulated in this Law instead of establishing a board of supervisors or supervisors. Employee representatives on the board of directors may become members of the audit committee." According to the new Company Law, the board of supervisors is no longer a mandatory part of corporate governance. Limited liability companies can opt for a single-tier governance structure centered on the board of directors.
One Person Can Form a Company
Regarding one-person limited liability companies, the new Company Law deletes the provision from the previous Company Law stating: "A natural person can only invest in the establishment of one one-person limited liability company, and that one-person limited liability company cannot invest in the establishment of a new one-person limited liability company." Under the new Company Law, a natural person can establish multiple one-person limited liability companies, and these companies can further invest in wholly-owned subsidiaries. This change makes investment and operation more convenient and flexible for individuals while allowing them to mitigate operational risks through subsidiary investments.
Regarding one-person joint-stock companies, Article 92 of the new Company Law states: "To establish a joint-stock company, there should be one to 200 promoters, with more than half of the promoters having domiciles within the People's Republic of China," thus allowing one promoter to establish a joint-stock company and recognizing the legal status of one-person joint-stock companies.
The new Company Law has officially come into effect as of July 1. Sinobravo will continue to monitor its practical applications and share insights with you.
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