Chapter Two: Formation of a Limited Liability Company The chapter focuses on the followings:

1.The conditions of incorporation2.The process of incorporation3.The controversial issues concerning the incorporation

Conditions for IncorporationQ: Suppose A and B are planning to set up a limited liability company, what conditions should they satisfy?

Article 23 The establishment of a limited liability company shall satisfy the following conditions:

(1) The number of shareholders accords with the quorum; (2) The amount of capital contributions paid by the shareholders reaches the statutory minimum amount of the registered capital; (3) The articles of incorporation are worked out jointly by shareholders; (4) The company has a name and its organizational structure complies with that of a limited liability company; and (5) The company has a domicile.

Section 1: Number of ShareholdersCondition 1 The number of shareholders accords with the quorumA limited liability company shall be established by no more than 50 shareholders that have made capital contributions. (Article 24)

Q: (1)Can only one natural person or a judicial person establish a limited liability company? (2)Can a foreign individual establish a LLC in China? Article 8 of Wholly-owned Foreign Enterprise Law in China

Section 2: Amount of capitalCondition 2 The amount of capital contributed by the shareholders reaches the statutory minimum amount of the registered capital. (Article 23) Question oneQuestion twoQuestion threeQuestion fourQuestion Five

The Definition of Registered CapitalQ1: What is the registered capital of a LLC?

Article 26:

(1)The registered capital of a LLC should be the one registered in the company registration authority.

(2)The registered capital of a LLC shall be the total amount of the capital contributions subscribed by all the shareholders.

The Amount of Registered CapitalQ2: What is the amount of registered capital?

Article 26:

(1)The minimum amount of registered capital of a limited liability company shall be RMB 30, 000.

(2)If any law or administrative regulation prescribes a relatively higher minimum amount of registered capital of a limited liability company, the provisions of that law or administrative regulation shall prevail.

Special Provisions of Registered Capital National Commercial Bank RMB1 billion

Insurance Company RMB200 million

Securities company (1) securities brokerage RMB50 million (2) securities investment consultancy RMB50 million (3) financial consultancy relating to securities trading and securities investment activities RMB50 million (4) securities underwriting & sponsoring RMB100 million (5) self dealer securities business RMB100 million (6) securities asset management RMB100 million

Capital Contribution MethodsQ3: Should shareholders make one-off capital contribution to the company?

Explanation on the distinction: subscribed capital paid-off (in) capital

Provisions on Capital Contribution MethodsArticle 26

The amount of the initial capital contributions made by all shareholders shall be no less than 20% of the registered capital

nor less than the statutory minimum amount of registered capital,

and the margin shall be paid off by the shareholders within 2 years as of the day when the company is established; as for an investment company, it may be paid off within 5 years.

Cases for DiscussionTwo investors A and B are preparing for the establishment of a LLC, the registered capital of which is 60,000 RMB.

Please indicate the validity of the followings:

(1) A and Bs initial capital contributions amount to 14,000 RMB. (2) A and B subscribe 30,000RMB respectively, and As initial contribution is 30,000RMB, while Bs initial contribution is zero.

Cases for Discussion(3) A and B subscribe 30,000RMB respectively, As initial capital contribution is 30,000RMB, and Bs is 10,000RMB. (without any special agreements on profit distribution)

In the first year, the business of LLC ran well and got the distributable profits of 1000RMB. B claimed 50% of those profits.

In the first year, the LLC ran bad and was in debt of 70,000RMB to creditors, then the court declared its bankruptcy. B argued that he should only be liable for the debt to the extent of 10,000RMB.

Forms of Capital ContributionQ4: Could shareholder use all the non-monetary assets as capital contribution?

Article 27 A shareholder may make capital contributions in currency, in kind or intellectual property right, land use right or other non-monetary properties that may be assessed on the basis of currency and may be transferred according to law, excluding the properties that shall not be treated as capital contributions according to any law or administrative regulation.

Discussion on the Forms of Capital ContributionCould the followings be capital contribution recognized by the company law?

(1) Human Capital

(2) Creditors Rights (appreciate or depreciate)

(3) Company Credit & Reputation

(4)Franchise Rights

Minimum Amount of Currency in the Capital ContributionQ5: What is the requirements on minimum amount of currency in the capital contribution?

Article 27The amount of the capital contributions in currency paid by all the shareholders shall be not less than 30% of the registered capital of the limited liability company

Controversial Issues in Capital ContributionCan borrowed money be used as capital contribution?

Can stolen or robbed money be used as capital contribution?

Section 3: Article of IncorporationCondition 3 The articles of incorporation are jointly prepared by shareholders.

Two basic issues :What provisions must be in the articles?What provisions could be optionally included in the articles?

Mandatory information in the articleArticle 25 A limited liability company shall state the following items in its articles of association: (1) the name and domicile of the company; (2) the business scope of the company; (3) the registered capital of the company; (4) names of shareholders; (5) forms, amount and date of capital contributions made by shareholders;

(6) the organizations of the company and its formation, their functions and rules of procedure; (7) the legal representative of the company; (8) other matters deemed necessary by shareholders.

The shareholders should affix their signatures or seals on the articles of association of the company.

Name of the corporation State the corporations complete name and include a reference to its corporate status.

Requirements:

a word such as limited liability company or limited company, or for brevity, written as Ltd.

Distinguishable upon the records from other names already in use or reserved for use.

not be deceptively similar to existing names.

Name of the corporationArticle 8 For a limited liability company established according to this Law, it shall indicate in its company name the words "limited liability company" or "limited company".

Example: Shanghai Dahua Culture & Entertainment Limited Liability Company

Purposes and powers of the corporations The articles shall state the corporations purposes and powers (scope of business).

The Trend and Common Practices in US

With the decline of the ultra vires doctrine, a purposes clauses is far less important than it once was.

The modern assumption is that the corporation can engage in any lawful business.

Purposes and powers of the corporationsMost state statutes in US contain an all-inclusive list of the activities a corporation may engage in.

Corporation has same powers as individualto carry out its business and affairs. (MBCA 3.02)

Purposes and powers of the corporations The regulations in China:

Clearly defined in the articles

File with the registration authority

Subject to changes by over 2/3 votes

Special businesses require administrative approval

Purposes and powers of the corporations Article 12

The company's business scope shall be defined in its articles of incorporation and shall be registered according to law. The company may change its business scope by modifying its articles of association, but shall go through the formalities for modifying the registration.

If the business scope of a company covers any item subject to approval pursuant to laws or administrative regulations, the approval shall be obtained according to law.

Capital Structure of the Corporation In US or UK, the articles must specify:the securities (or shares) the corporation will have authority to issue.the various classes of authorized shares.the number of shares of each classthe privileges, rights, limitations and the preferences of each shares.

Mostly, the same rules apply to the companies limited by shares of China.

But for the LLC in China, it is a little different.

Capital Structure of the Corporation The articles must specify: the registered capital of the company; names of shareholders forms, amount and date of capital contributions made by shareholders

Corporate Governance StructureThe articles specify the organizations of the company and its formation, their functions and rules of procedure.

Size/composition of board of directors.To be discussed later on.

Registered office and agentRegistered office vs. domicileRegistered office: state the corporations address for services of process and for sending official notices or other documents. Domicile: the main location for business operation

Registered agent vs. legal representativeRegistered agent: the person dealing with the corporate procedural matters at the registered officeLegal representative: the person acting on behalf of the company

The slate of legal representativeArticle 13 The legal representative of a company shall, according to the provisions of its articles of association, be assumed by the chairman of the board of directors, executive director or manager, and shall be registered according to law. If the legal representative of the company is changed, the company shall go through the formalities for modifying the registration.

Optional Provisions in ArticlesTo customize the corporation, the articles can contain a broad range of other provisions.

Membership of Legal representative (Art. 13)Management provisions, such as reinvestment or guarantee limits (Art. 16)Dividend distribution (Art. 35)Voting weight provisions (Art. 43)

DiscussionsQ1: What is the differences between articles of association and by-law in US?Q2: In China, what is the binding force of articles of association? Is it binding on creditors of the company?Case: A 10 Million B bank

B Guarantee

The board of directors, beyond its authority made decision.

The binding forces of articles of association

Article 11 The company established according to this law shall formulate its articles of association which are binding on the company, its shareholders, directors, supervisors and senior managers.Article 12 The company's business scope shall be defined in its articles of association and shall be registered according to law. (continuing next page)

Article 12 The company may change its business scope by modifying its articles of association, but shall go through the formalities for modifying the registration. If the business scope of a company covers any item subject to approval pursuant to laws or administrative regulations, the approval shall be obtained according to law.

Section 4 Corporate NameCondition 4 The company has a name and its organizational structure complies with that of a limited liability company.

Article 8 For a limited liability company established according to this Law, it shall indicate in its company name the words "limited liability company" or "limited company". For a company limited by shares established according to this Law, it shall indicate in its company name the words "joint stock limited company" or "joint stock company".

Section 5 Corporate DomicileCondition 5 The company has a domicile.

Please refer to the previous section.

The establishment procedure

Qualified shareholders

Capital contribution

Accounts report

Articles of association

Name and CG

Pre-checked+

confirmed

Registration Authority

Application form

certification