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WHAT IS CHARTER CAPITAL? WHAT IS THE TIME LIMIT FOR CONTRIBUTING AND INCREASING OR DECREASING CHARTER CAPITAL?
Charter capital is one of the important factors that business owners need to pay attention to when registering to establish a business. The following article will delve into legal issues related to charter capital according to current law.
WHAT IS CHARTER CAPITAL?
The concept of charter capital is stipulated in the Law on Enterprise 2020: Charter capital means the total value of assets that have been contributed or promised by the members/partners/owners when the limited liability company or partnership is established; or the total of nominal values of the sold or subscribed shares when a joint stock company is established.
Charter capital is of particular importance when determining the capital contribution ratio of members, owners, and shareholders in the company. This is also the basis for profit distribution as well as determining the rights and obligations of members participating in capital contribution. In addition, partners can also base on charter capital to decide whether to cooperate or not. Because large or small capital will show the scale, capacity and position of the company in the market.
DISTINGUISHING CHARTER CAPITAL AND LEGAL CAPITAL
Charter capital and legal capital are basically the initial capital contributed by investors to establish a business, however, there are some differences between these two types of capital:
| Charter capital | Legal capital | |
| Basis for determination | Charter capital is the required capital when registering to establish a company..
During operation, a business can increase or decrease its charter capital but cannot reduce its charter capital below the legal capital. |
Legal capital will be determined based on the specific business lines of the business, regardless of the type of business.
If a company intends to do business in an industry that requires legal capital, its contributed capital must be at least equal to the legal capital. |
| Capital level | Current Vietnamese law does not have regulations on the minimum or maximum charter capital level when establishing a business. | Any business line that requires legal capital has a fixed capital level.
For example: Real estate business has a legal capital of 6 billion. |
| Capital contribution period | Capital contribution must be made within 90 days from the date of issuance of the Business Registration Certificate. | Full capital contribution must be made from the time of starting a conditional business. |
IS IT NECESSARY TO PROVE CHARTER CAPITAL WHEN ESTABLISHING A BUSINESS?
Currently, the current law does not have regulations on the obligation to prove charter capital when registering to establish a business. Accordingly, the charter capital will be self-registered by the enterprise and the enterprise will be responsible for the accuracy of the declared content.
However, in the case of an enterprise operating in an industry that requires legal capital, the charter capital must not be lower than the legal capital. In the case of a deposit capital requirement, the enterprise will have to prove it.
HOW MUCH CHARTER CAPITAL IS ENOUGH?
The current Enterprise Law does not have regulations on specific charter capital levels for each type of enterprise or each business sector. Business owners will base on their capabilities and business goals to accurately calculate the appropriate charter capital level. Normally, businesses will consider the following factors to determine the charter capital level:
- Scope and scale of business operations;
- Financial capacity of owners, members, and shareholders of the company;
- Actual operating costs of the enterprise after establishment;
- Business projects signed with partners, etc.
MINIMUM CHARTER CAPITAL
The law does not stipulate a limit on charter capital. Therefore, except for businesses operating in industries with regulations on legal capital and deposit levels, there will be no limit on minimum charter capital, and businesses can freely choose the capital level.
In cases where businesses operate in industries with regulations on legal capital and deposit levels, the minimum charter capital can be calculated as = legal capital or deposit.
MAXIMUM CHARTER CAPITAL
As mentioned above, the law does not have any regulations on charter capital limits, so enterprises can decide on their own capital levels.
WHAT TYPES OF ASSETS CAN BE USED TO CONTRIBUTE CHARTER CAPITAL?
According to Article 34 of the Law on Enterprise 2020 : Capital contributions are Vietnamese Dong, freely convertible foreign currencies, gold, land use rights, intellectual property rights, technology, technical know-how, and other assets that can be valued in Vietnamese Dong. That is, investors can contribute capital in the form of real estate, cash, cars, premises use rights, etc. as long as there is a written agreement on the value of the assets of all capital contributors.
A note is that only individuals and organizations that are legal owners or have legal rights to use the above assets have the right to use those assets to contribute capital.
In addition, according to the provisions of Article 35 of the Law on Enterprise 2020, members of limited liability companies, partnerships and shareholders of joint stock companies must be responsible for transferring ownership of contributed assets to the company:
- Assets with registered ownership or land use rights: Must complete procedures to transfer ownership of assets or land use rights to the company.
- Assets without registered ownership: Must hand over contributed assets with confirmation by minutes, except in cases where it is done through an account.
CHARTER CAPITAL CONTRIBUTION DEADLINE
Capital contribution deadline of a single-member LLC
According to Clause 2, Article 75 of the Law on Enterprise 2020, the owner of a single-member LLC must fully contribute the correct type of assets as committed within 90 days from the date of issuance of the Enterprise Registration Certificate. During these 90 days, the company owner has the rights and obligations corresponding to the committed capital contribution.
If the committed capital is not fully contributed within the above 90-day period, the company owner must register a change to the charter capital within 30 days from the last day of full charter capital contribution. The owner is still responsible for the company’s financial obligations arising during the charter capital change period, corresponding to the committed capital contribution.
CAPITAL CONTRIBUTION PERIOD OF LLCS WITH 2 OR MORE MEMBERS
According to Clause 2, Article 47 of the law Enterprise 2020, members must contribute the full amount and the correct type of assets as committed within 90 days from the date of issuance of the Enterprise Registration Certificate. During this period, members have rights and obligations corresponding to the committed capital contribution. If approved by more than 50% of the remaining members, capital contributing members may contribute assets other than the committed assets.
The company must register a change in charter capital within 30 days from the last day of the capital contribution period if members have not contributed or have not contributed the full amount of capital as committed.
CAPITAL CONTRIBUTION PERIOD OF A JOINT STOCK COMPANY
The capital contribution period of a joint stock company is stipulated in Clause 1, Article 113 of the Law on Enterprise 2020: Shareholders must fully pay for the registered shares within 90 days from the date of issuance of the Enterprise Registration Certificate, unless the Company Charter or the share purchase registration contract stipulates a shorter period.
In case shareholders contribute capital in the form of assets, the time for transporting, importing, and carrying out administrative procedures to transfer ownership of such assets shall not be included in this capital contribution period. The Board of Directors is responsible for supervising and urging shareholders to fully and timely pay for the registered shares.
Accordingly, the period for contributing charter capital to a joint stock company is 90 days from the date of issuance of the Enterprise Registration Certificate. During this period, shareholders must fully pay for the registered shares when registering to establish a joint stock company.
A joint stock company must register to adjust its charter capital to the par value of the shares paid within 30 days. If after 90 days the shareholders have not paid in full for the registered shares,
CAPITAL CONTRIBUTION PERIOD OF A PARTNERSHIP
The capital contribution period to a partnership is not specifically stipulated in the Enterprise Law 2020. Instead, Clause 1, Article 178 of the Law on Enterprise 2020 only stipulates: General partners and capital contributing members must contribute the committed capital in full and on time. Thus, the charter capital contribution period of members must be ensured to be implemented according to the committed deadline.
A general partner who fails to contribute the committed capital in full and on time and causes damage to the company must be responsible for compensating for the damage.
If a capital contributing member fails to contribute the committed capital in full and on time, the uncontributed capital will be considered a debt of that member to the company.
CAPITAL CONTRIBUTION PERIOD OF PRIVATE ENTERPRISES
A private enterprise is owned by an individual who is personally responsible for all activities of the enterprise with all of his/her assets. Therefore, the owner of a private enterprise will not need to transfer ownership of the contributed capital to the private enterprise.
According to the provisions of Article 189 of the Enterprise Law 2020, the investment capital of the owner of a private enterprise will be registered by the owner himself/herself. All capital and assets used for business activities must be fully recorded in the accounting books and financial statements of the enterprise.
WHAT SHOULD BE DONE IF A MEMBER OR SHAREHOLDER FAILS TO CONTRIBUTE SUFFICIENT CAPITAL?
For a single-member LLC
Pursuant to Clause 3, Article 75 of the Law on Enterprise 2020 , if the company owner fails to contribute sufficient charter capital within the prescribed time limit, the charter capital must be reduced within 30 days. During this 30-day period, the company owner is still responsible for financial obligations arising in proportion to the committed capital contribution.
The company owner is responsible with all of his/her assets for the company’s financial obligations and damages caused by failure to contribute, failure to contribute in full, or failure to contribute on time the charter capital as prescribed in this Article.
For LLCs with 2 or more members
Pursuant to Clause 3, Article 47 of the Law on Enterprise 2020, if a company member does not contribute or has contributed but not enough capital as committed, it will be handled as follows:
- A member who does not contribute capital as committed is naturally no longer a member of the company.
- A member who has not contributed the full capital as committed has the rights corresponding to the contributed capital.
- The uncontributed capital of the members is offered for sale according to the resolution or decision of the Board of Members of the LLC with 2 or more members.
For joint stock companies
Pursuant to Clause 3, Article 113 of the Law on Enterprise 2020, in case a shareholder has not paid or only paid a part of the registered shares, it will be handled as follows:
- A shareholder who has not paid for the registered shares is naturally no longer a shareholder of the company, and at the same time, is not allowed to transfer the right to purchase to another person.
- New shareholders who have paid a portion of the registered shares have the right to vote, receive dividends and other rights corresponding to the paid shares; the right to purchase unpaid shares may not be transferred to others.
- Unpaid shares are considered unsold shares and the Board of Directors has the right to sell them.
For partnerships
Pursuant to Article 178 of the Enterprise Law 2022, general partners and capital contributors must fully contribute the committed capital.
If a general partner fails to fully contribute on time and causes damage to the company, that person must be responsible for compensation.
If a capital contributor fails to fully contribute the committed capital, the uncontributed capital is considered a debt of that member to the company.
CASES OF INCREASING OR DECREASING CHARTER CAPITAL
Cases Of Increasing Or Decreasing Charter Capital Of A Single-Member Llc
A one-member LLC increases its charter capital when the company owner contributes additional capital or mobilizes additional capital contributions from others. The company owner decides on the form of increase and the amount of increase in charter capital.
A one-member LLC reduces its charter capital in the following cases:
- Returning a portion of the capital contribution to the company owner if the company has been operating continuously for 02 years or more from the date of business registration and ensuring full payment of debts and other financial obligations after returning the capital contribution to the company owner;
- The charter capital is not fully and timely paid by the company owner as prescribed in Article 75 of the Law on Enterprise 2020.
CASES OF INCREASING OR DECREASING CHARTER CAPITAL IN A TWO-MEMBER OR MORE LLC
A two-member or more LLC may increase its charter capital in the following cases:
- Increasing the capital contribution of members;
- Accepting additional capital contributions from new members.
A limited liability company with two or more members may reduce its charter capital in the following cases:
- Returning a portion of the capital contribution to members in proportion to their capital contribution in the company’s charter capital if it has been operating continuously for 02 years or more from the date of business registration and ensuring full payment of debts and other financial obligations after returning to members;
- The company buys back the capital contribution of members according to the provisions of Article 51 of this Law;
The charter capital is not fully and timely paid by members according to the provisions of Article 47 of the Law on Enterprise 2020.
In case of increasing or decreasing the charter capital of a joint stock company
A joint stock company may increase its charter capital by offering shares. Offering shares can be done in the following ways:
- Offering shares to existing shareholders;
- Offering individual shares;
- Offering shares to the public.
A joint stock company may reduce its charter capital in the following cases:
- According to the decision of the General Meeting of Shareholders, the company shall return a portion of the contributed capital to shareholders in proportion to their share ownership in the company if the company has been operating continuously for 02 years or more from the date of registration of the establishment of the enterprise and ensures full payment of debts and other financial obligations after returning them to shareholders;
- The company repurchases the sold shares in accordance with the provisions of Articles 132 and 133 of the Law on Enterprises 2020;
- The charter capital is not fully and timely paid by shareholders in accordance with the provisions of Article 113 of the Law on Enterprises 2020.
In case of increasing or decreasing the charter capital of a partnership
The charter capital of a partnership is the total value of assets contributed or committed to be contributed by the company’s members when establishing the partnership.
A partnership can increase its charter capital by accepting additional partners or capital contributors.
A partnership can reduce its charter capital by terminating its membership status.
Above is the content shared about legal regulations related to charter capital of Siglaw Law Firm. If you have any questions, please contact Siglaw Law Firm LLC for the best support. Goodbye and see you again in the next sharing content.
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