Setting Up a Company in China? Avoid These Fatal Corporate Structure Mistakes
Setting Up a Company in China? Avoid These Two Fatal Corporate Structure Mistakes
One is a ticking clock. The other can make you personally liable for company debts. Both are common — and both are fixable.
The 10-Year Trap
A company was incorporated in 2015 with registered capital of RMB 10 million. The shareholders — two individuals — never actually paid in the capital. For ten years, the company operated, signed contracts, employed staff, paid taxes. The registered capital sat on the books as an unpaid promise.
Under China’s old Company Law, this was common. There was no statutory deadline for capital contribution. Shareholders could set the contribution deadline decades into the future. Many did.
Then the new Company Law took effect on July 1, 2024. Article 47 introduced a hard deadline: registered capital must be fully paid in within five years of incorporation. For companies incorporated before the new law took effect, there is a transition period ending June 30, 2027.
After that date, unpaid registered capital becomes a direct personal liability of the shareholders.
What this means in practice:
If your Chinese subsidiary or joint venture was incorporated before July 2024 and has registered capital that has not been fully paid in, the clock is ticking. You have until mid-2027 to either:
- Pay it in. Transfer the full amount of registered capital into the company’s account. This satisfies the statutory requirement but ties up capital.
- Reduce it. File a capital reduction with the local AMR (Administration for Market Regulation). Reduce the registered capital to an amount that has actually been paid in, or that can realistically be paid in within the remaining transition period. For a small operating company with RMB 1-2 million in actual needs, registered capital of RMB 10 million serves no purpose except liability.
We recently advised a client — a profitable, growing company — to reduce its registered capital from RMB 10 million to RMB 1.5 million. The shareholders had paid in zero. The business did not need RMB 10 million in registered capital; it needed a legally compliant structure. The capital reduction took approximately 45 days and cost a few thousand RMB in filing fees and newspaper publication costs. It eliminated more than RMB 8 million in contingent personal liability.
Do not wait until 2027. The AMR will be flooded with last-minute capital reduction applications. Start the process now.
The Address Trap — and Corporate Veil Piercing
The same company had a second problem. It shared an office address, employees, and even a bank signatory with another company controlled by the same shareholder. The two companies were legally separate entities. In practice, they operated as one.
Under Article 20(3) of China’s Company Law, this is the classic fact pattern for piercing the corporate veil (法人人格否认):
“If a company shareholder abuses the independent legal person status of the company and the limited liability of shareholders to evade debts and seriously damage the interests of the company’s creditors, the shareholder shall bear joint and several liability for the company’s debts.”
What does “abuse” look like to a Chinese court? The Supreme People’s Court has identified several factors in its guiding cases:
- Address mingling — two companies registered at the same address, using the same office space, with no physical separation.
- Personnel mingling — the same person signing contracts, issuing invoices, and managing bank accounts for both companies. The same HR manager. The same finance person.
- Asset mingling — funds moving between the two companies without proper documentation, inter-company loans without board resolutions, one company paying the other’s expenses.
- Business mingling — the two companies serving the same customers with the same products, using the same contracts and pricing.
If a court finds these factors present, the shareholder can be held personally liable for all debts of both companies. Limited liability — the fundamental protection of the corporate form — evaporates.
How to fix it:
- Separate the addresses. Each company should have its own registered address and physical office. If you must share an address for cost reasons, at minimum designate separate rooms or floors, use separate signage, and maintain separate lease agreements.
- Separate the personnel. Different legal representatives. Different bank signatories. Different finance and HR staff. If key personnel must serve both companies, document their roles with separate employment contracts and clear allocation of time.
- Separate the assets. No commingled bank accounts. No inter-company transfers without a written agreement, board resolutions, and proper accounting treatment. Every RMB that moves between related companies should have a paper trail.
- Separate the business. Different customers, different contracts, different branding. If the two companies serve the same industry, clearly delineate their respective scopes in writing.
Why This Matters for Foreign Investors
Foreign companies operating in China typically use one of two structures: a wholly foreign-owned enterprise (WFOE) or a joint venture (JV) with a Chinese partner. Both are Chinese legal entities subject to the Company Law.
If you have a WFOE:
- Check its registered capital against actual paid-in capital. If there is a gap, start the capital reduction process.
- Ensure the WFOE’s address, personnel, and assets are fully separated from any other entity you control in China or elsewhere.
If you have a JV:
- The same registered capital rules apply — but you also need to verify your Chinese partner’s compliance. Your partner’s capital contribution failure can become your problem.
- JVs are particularly vulnerable to veil-piercing because the Chinese partner often controls day-to-day operations. If your partner commingles assets, your exposure is joint and several.
A Third Issue Worth Mentioning: IP Ownership
The same company we advised had a third problem: all of its intellectual property — trademarks, copyrights, design patents — was registered in the name of the operating company. The same company that signs supplier contracts, employs staff, and faces litigation risk.
If that company is sued, goes bankrupt, or has its assets frozen, the IP goes down with it.
The better structure: a separate IP holding company that owns the intellectual property and licenses it to the operating company. The IP holding company has no employees, no operations, and no contract exposure. If the operating company is sued, the IP is insulated. This is not tax avoidance — it is basic asset protection, and it is standard practice for any company whose value is primarily in its intellectual property.
For a small company, this may be a phase-two initiative — something to implement once revenue exceeds RMB 5-10 million. But it should be on the roadmap from day one.
What to Do This Week
- Pull your Chinese entity’s business license (营业执照). Look at the registered capital (注册资本) line. Compare it to actual paid-in capital. If there is a gap, schedule a call with your PRC counsel.
- Check your registered address. Does any other entity — related or unrelated — use the same address? If yes, fix it.
- Check your bank signatories and legal representative. Are the same individuals serving in the same roles across multiple entities? If yes, document the separation or appoint different individuals.
- Check where your IP is registered. If it is in the name of your operating company, start planning the IP holding company structure.
None of these problems is difficult to fix. But all of them are expensive to ignore.
This article is based on actual client matters handled by the author. All identifying details have been removed. It is for informational purposes only and does not constitute legal advice. Company Law requirements vary based on entity type, location, and specific circumstances. Consult qualified PRC counsel.
Author: Jianxing Pan
Partner, Beijing ChangAn Law Firm
Offices in Beijing and Shenzhen
lawyerpan@vip.163.com