2.2.2 Limited liability companies

In PRC Company Law, Article 3 defines a limited liability company as a company whose shareholders assume liability towards the company within the limit of their respective subscribed capital contributions. In contrast to a joint stock limited company, a limited liability company cannot go public, and the transfer of shares requires consent of the other shareholders.1 In a limited liability company, the number of shareholders may not be more than 50.2 Previously, a single member company was not allowed, except for the state owned company. Now, provided that certain requirements are met, a single member company is permitted in the form of a limited liability company.

Though sharing the same name, a limited liability company in China is not the same as a limited liability company in America.3 Its counterparts in UK and USA are usually termed as close companies or closely held companies. Yet, unlike those legislative systems, Chapter 2 and 3 of the new Company Law are especially tailored to limited liability companies. Requirements and provisions are laid down especially for a limited liability company, such as requirements for incorporation, capitalization, organizational structure, and transfer of shares. The required minimum registered capital for a limited liability company is RMB 30,000, which is much lower than the previous requirement.4 And the time requirement for payment is the same as that for a company limited by shares.5 Limited liability companies are mandated to set up a two-tier management structure.6 Generally speaking, public and private companies in China have the same governance structure, a board of directors and a supervisory board.

Currently, there are three special kinds of limited liability companies that have different requirements from the general limited liability companies. They are single member companies, state owned companies, and FIEs.7 Foreign businessmen intending to do business in the corporate form in China are required to use one of the FlEs forms. Traditionally, there were only 3 types of FlEs, namely, Chinese-Foreign equity joint ventures, Chinese-Foreign contractual joint ventures and Foreign capital enterprises. Given their relevance to this study and their economic importance in China, FlEs are briefly introduced in the following section.