What is large and small when it comes to the charter capital?

GV Lawyers would like to introduce to our readers an article by Lawyer Do Duc Anh titled “What is large and small when it comes to the charter capital?” was published in Saigon Economic Times No. 27-2021 (1,594) on 01 July 2021.

 

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Registering a charter capital of VND500,000 billion is suspected, so is it possible to register the one worth VND1 million?

 

Recently, there has been a lot of buzzing public opinion about an enterprise registered for establishment with a charter capital of VND500,000 billion (about USD21.7 billion) in Ho Chi Minh City. Actually, the charter capital of USD21.7 billion is not reported in our country.

 

In contrast, will the business registration agency accept a registered enterprise with its charter capital worth only VND1 million? This question leads to another more important question: what is charter capital?

 

Pursuant to the Law on Enterprises 2020, charter capital is the total value of assets committed by founding members or shareholders to contribute upon establishing a company. Thus, charter capital has two meanings: (1) initial capital for the company to operate, and (2) limited liability of members/shareholders of the company.

 

Charter capital: initial capital but not all

 

Charter capital indicates the initial capital of the enterprise that the company uses for business. In the course of business, the company may generate profits, then the company’s assets will be greater than the initial charter capital. But if the company suffers a loss, the company’s assets will reduce, then the actual remaining assets may be smaller than the charter capital. In such cases, the value of charter capital may not accurately represent the current financial position of the company.

 

Therefore, upon dealing with companies, instead of just paying attention to the charter capital, we should take note of with the current asset value of the company, more specifically its net asset value (i.e. take assets less liabilities of the company) because a net asset value is the economic basis to secure the company’s obligations. A company with a charter capital of VND100 billion but owing VND150 billion cannot be considered financially healthy compared to a company with charter capital of VND20 billion and no debt.

 

Charter capital: limited liability of members or shareholders

 

For limited liability companies and joint stock companies, the charter capital is the limited liability of members or shareholders for the debts of the company. After fully contributing the charter capital, members or shareholders will not have to bear any additional property obligations towards the company. In other words, regardless of the company’s profits or losses, the members or shareholders have no additional liability to the third party.

 

From investors’ point of view, they always want their liability to be as low as possible to the extent permitted by law. But the next question is to what extent may member or shareholder liability be lowered? The reality of investment around the world shows that many companies are established with a charter capital of 1 or 2 dollars (i.e. VND20,000 – VND50,000).

 

Hence a question is raised: if the company only has a charter capital of 1 or 2 dollars, how does it operate? The answer is absolutely likely. A commonly used option is that after the establishment of a company, members or shareholders will lend the company a loan lies in that a member or shareholder, as a lender, can withdraw the loan at any time under the loan agreement without waiting until the company earns profits to distribute as per capital contribution plan. In addition, the loan recovery does not generate income for the lender (member or shareholder), so the member or shareholder does not have to pay income taxes on the income or dividends received.

 

At the same time, it should be mentioned that it is always easier to contribute less capital than to contribute a lot, especially when the current Law on Enterprises stipulates a period of 90 days of establishment of the enterprise for members or shareholders to contribute enough capital.

 

Expecting an open view from the licensing authority

 

As for the case of setting up a company with a charter capital of VND500,000 billion, the reaction of the licensing agency was another surprise for those who are interested in. The licensing agency sent an official dispatch to the Ministry of Public Security and Police of Ho Chi Minh City, saying that the founder was “unconscious” upon “deliberately playing with the law”.

 

The fact that the licensing authority issues business registration certificate to the company has shown that excessive capital registration may be unusual but not illegal. Therefore, the fact that the licensing agency sends an official letter to the police is difficult to understand and cannot help but make many people feel like the licensing agency wants to “forewarn” the enterprises to set an example for other enterprises.

 

On the other hand, setting up a company with a low charter capital (VND20 million, VND10 million or less) is not a violation of the Law on Enterprises when an enterprise registers a business line that does not require legal capital and the Law on Enterprises and the implementation documents also do not limit the minimum charter capital upon establishing the company. However, enterprises have been repeatedly asked by the licensing agency to increase the amount of charter capital because their registered capital is too low.

 

The aforesaid fact shows that the current licensing authorities do not like what is too unusual in the licensing process. However, today’s business reality changes very quickly and perhaps more openness from the licensing authorities is expected if the requests of the enterprise are unusual but not illegal, for example, its simple decision on the charter capital value when registering.

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