Limited liability companies (LLCs) have emerged as a favored option for entrepreneurs and businesses globally, owing to their adaptable structure, liability protection, and straightforward formation process. However, the protocols for establishing an LLC vary significantly across different jurisdictions, each imposing distinct minimum capitalization requirements and regulations governing capital contributions.
In this article, we explore the regulatory landscapes of four diverse economies: China, Italy, India, and Vietnam. Our objective is to furnish entrepreneurs, investors, and legal professionals with a thorough understanding of the challenges and opportunities entailed in forming LLCs within each jurisdiction.
In China, the establishment of a limited liability company, including foreign-invested enterprises (FIEs), doesn’t necessitate a fixed minimum registered capital, except for certain sectors like securities, banking, and insurance.
China adopts a subscribed capital model, facilitating gradual payment of capital contributions. Previously, companies determined their own schedule for injecting subscribed capital, which could extend until the expiration day of the Business License. However, with the 2023 amendment to the Company Law, effective from July 1, 2024, shareholders of a Limited Liability Company (LLC) will be mandated to fully pay their subscribed capital within five years of incorporation.
Capital contributions in China can be made in cash or in-kind, such as capital equipment, buildings, technology, land-use rights, intellectual property rights, and, starting from July 1, 2024, also account receivables. For in-kind contributions, the value of assets must be subject to appraisal and verification, so to ensure it is not overestimated or underestimated.
Determining the registered capital amount is pivotal, particularly for foreign invested enterprises (FIE), since the registered capital amount can impact the offshore debt an FIE can incur. FIEs in China may register foreign loans alongside the registered capital as part of the “total investment”, subject to a predefined limit called the “foreign debt quota”. This quota, as the difference of total investment and registered capital, is integral to regulating the debt-to-equity ratio for foreign invested enterprises, which increases with the registered capital amount. For instance, for a total investment of USD 3 million or less, the minimum registered capital must account for at least 70% of the total investment.
However, FIEs can also opt for the Macro-Prudential Method to determine the upper limit of permitted foreign debt, subject to submission to the State Administration of Foreign Exchange (SAFE) for approval. This method incorporates assets, net assets, financing leverage ratio, and macroprudential adjustment parameters, potentially allowing a foreign loan exceeding the standard quota.
In India, the Companies Act, 2013 makes provision for infusion of capital for private limited company which is one of the most prevalent type of company in India. A private company which includes companies holding foreign investments are required to contribute its capital into the company by way of share capital. In the Indian Companies Act, share capital refers to a company’s percentage of capital or interest.
The Share Capital are classified into two types of shares being the Authorized Share Capital and Paid-Up Share Capital. An authorized capital refers to the maximum number of shares that a company may issue which inversely means the maximum amount of share capital a company can hold. The Company is required to mention its authorized share capital in its charter document called as the Memorandum of Association at the time formation of the Company. The Company may raise its limit of its authorized share capital from time to time by following the required procedure laid down by the Companies Act, 2013.
On the other hand, Paid-Up capital for a private limited company represents the portion of the authorized capital that the company has actually issued and sold to its shareholders. It signifies the amount of capital that shareholders have contributed by purchasing shares. For example, if the Company has an Authorized Share Capital of Rs. 3,00,000/- (Euro 3330 approximately) as mentioned in its Memorandum of Association but has only sold and received shares worth Rs. 1,00,000/- ,(Euro 1110 approximately). The paid up capital of the Company shall be considered to be Rs. 1,00,000/- (Euro 1110 approximately).
Historically, the minimum paid up capital for Private Limited company was Rs. 1,00,000/- (Euro 1110 approximately) , as per the provisions of the Companies Act of 2013. However, on account of the recent amendment called as The Companies (Amendments) Act of 2015, the requirement for minimum paid-up capital for Private Limited company in India was abolished and therefore a private company are burdened with meeting the specific minimum capital threshold.
Despite the removal of the minimum paid-up capital requirement, it’s important to note that an Authorized Capital of Rs. 1,00,000/- (Euro 1110 approximately) is still a pre-requisite for formation of a Private Limited Company.
In Italy, the ordinary minimum registered capital requirement for a limited liability company is EUR 10,000. However, a reform approved in 2013 established that a limited liability company may be formed with a lower capital, equal to at least EUR 1, provided that it is fully paid upfront and that at least 1/5 of the yearly net profits of the company, as shown in the approved financial statements, is set aside as a reserve until this reserve, combined with the registered capital, reaches EUR 10,000.
Additionally, Italy stipulates clear statutory maximum terms for the payment of registered capital. Specifically, the registered capital must be paid at the time of company incorporation in two scenarios: (i) when the company has a single shareholder; (ii) when the company has a registered capital determined in an amount lower than EUR 10,000, as specified above. In other cases, at least 25% of the registered capital must be paid at the time of company incorporation.
Capital can be contributed in cash or in kind, except when the company has a registered capital lower than EUR 10,000. In-kind contributions involve the assignment of an asset other than money by the shareholder to the company, the value of which will constitute the share capital. All assets susceptible to economic evaluation can be contributed, including account receivables. The value of in-kind contributions must be verified by an assessment report signed by an authorized Italian auditor or auditing company registered in the relevant professional registry in Italy.
It’s essential to highlight that Italian laws offer considerable flexibility for financing limited liability companies. Shareholders or even third parties (on an occasional and non-professional basis) are permitted to provide loans to the company without restrictions, and these loans can even be non-refundable (in such cases, they will be deemed and treated as capital reserves). In the event of financial distress, the repayment of shareholders’ loans is subordinated to the repayment of other company creditors. This prioritization ensures that the interests of external creditors are protected before shareholders’ loans are repaid.
In Vietnam, the majority of sectors and business lines do not prescribe specific minimum capital requirements. However, The Department of Planning and Investment evaluates the registered capital to ensure it adequately covers the business’s operational expenses until it achieves self-sufficiency. It is advisable to verify in advance whether the proposed business scope falls under sectors subject to minimum capital requirements, as certain industries may be governed by specific regulations.
In addition, for Foreign Invested Enterprises (FIEs), it’s crucial to clarify the distinction between Charter Capital and Total Investment. Charter capital represents the capital contributed or committed to contribute by shareholders upon company establishment. Total investment, on the other hand, encompasses the investor’s capital contribution for project implementation plus mobilized capital. Both charter capital and total investment, inclusive of shareholders’ loans or third-party finance, must be registered with Vietnam’s licensing authority.
Charter capital is subject to a 90-day capital contribution term from the issuance date of the initial enterprise registration certificate and is documented in the company’s charter.
Regarding asset regulations for charter capital contribution, Article 34 of the 2020 Enterprise Law delineates the eligible assets, which include Vietnamese Dong (VND), convertible foreign currencies, machineries, land use rights (LUR) and other assets convertible into VND.
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