What is charter capital? Cases of increasing and decreasing charter capital

Charter capital is one of the important concepts in the business field, especially for enterprises. It not only affects the company’s operations but also determines the financial capacity and borrowing ability of the business. In this article, we will explore in detail charter capital, its role, its significance, as well as the impact of charter capital on borrowing capacity.

1. What is charter capital?

Charter capital is the total value of assets that members or shareholders have committed to contribute or have contributed to the enterprise upon its establishment, as recorded in the company’s charter. Charter capital represents the financial responsibility of the members for the business operations and the debt obligations of the enterprise within the scope of the contributed capital.

See more: What is owner’s equity? The most standard and accurate calculation method

2. The role and significance of charter capital

Charter capital plays a crucial role in the formation and maintenance of a business’s operations, while also carrying significant meaning throughout its operation and development. Specifically:

The role of charter capital

• Legal foundation for business operations: Charter capital is the minimum amount of capital that members or shareholders commit to contribute when establishing a business, recorded in the company’s Charter and business registration. This serves as the legal basis for the business to commence operations.
• Building trust with partners and customers: The size of the charter capital is often seen as an indicator of the business’s financial strength. This helps build trust with partners, customers, and investors.
• Defining the rights and obligations of members/shareholders: Charter capital is used to allocate capital contribution ratios, thereby determining the rights and responsibilities of members/shareholders in the company.

The significance of charter capital

• Basis for assessing financial capacity: Charter capital demonstrates the commitment of members/shareholders to the development of the business and serves as a basis for state management agencies to verify financial capacity in conditional business sectors.
• Increasing access to capital sources: Businesses with high charter capital often find it easier to access loans and funding from banks or large investors.
• Ensuring legal liability: According to legal regulations, members/shareholders are only liable for financial obligations within the scope of their contributed capital. This protects the interests of both the business and third parties in case of risks.

3. Differentiating charter capital from other types of capital

In business operations, concepts like charter capital, legal capital, and owner’s equity are often confused, yet they play a core role in determining a company’s financial capacity. Below is a comparison table to help you clearly understand the differences between these three types of capital.

4. How to Calculate Charter Capital

4.1 In a Single-Member Limited Liability Company

According to Clause 1, Article 75 of the 2020 Law on Enterprises, the owner of a limited liability company is financially responsible for all company activities. The business owner must commit to contributing the full and correct type of assets upon company registration and must do so within 90 days from the date the Certificate of Business Registration is issued, excluding the time for transportation, import of contributed assets, or transfer of asset ownership.

If the registered capital is not fully contributed within the specified period, the owner must register a change in charter capital to reflect the actual value of the contributed assets within 30 days from the final contribution deadline.

The owner is liable with all their personal assets for the company’s financial obligations, including any damages arising from insufficient, incomplete, or late capital contributions as per regulations.

4.2 For a Multi-Member Limited Liability Company

According to Clause 1, Article 47 of the 2020 Law on Enterprises:

Members of a limited liability company are responsible within the scope of the capital they have committed to contribute to the company. Members must contribute their capital in full and with the correct assets within 90 days from the date of receiving the Certificate of Business Registration, excluding the time for transportation, import of contributed assets, or procedures for transferring ownership. A member can only contribute assets other than those committed with the consent of over 50% of the remaining members. If, after the commitment period, a member fails to contribute part or all of their committed capital, the situation will be handled as follows:

• The member who fails to contribute capital will lose their membership status and ownership rights in the company.
• Shareholders who have not fully contributed their committed capital will only be entitled to rights corresponding to the portion of capital they have contributed.
• The un-contributed capital portion of the members will be sold by auction as decided by the Members’ Council.

In a situation where a member does not contribute the full or correct amount of committed capital, the company must register a change in the charter capital and the capital contribution ratio of each member within 30 days from the final day of the change process.

See more:

• What is Fixed Capital? Characteristics, Role & Calculation Formula
• What is Working Capital? Calculation Formula and Management Methods

For members who have fully contributed their capital, the company will issue a certificate of capital contribution, which includes the following information:

• The company’s name, business code, address, and charter capital.
• Full name, nationality, contact address, and legal documents of the individual if the member is an individual; or the organization’s name, business code or legal document number, and address if the member is an organization.
• The total contributed capital and the capital contribution ratio of each member.
• The date of issuance of the certificate of capital contribution.
• The full name and signature of the company’s legal representative.
• In case the certificate of capital contribution is lost, damaged, or destroyed in any other form, the company will re-issue it according to the company’s Charter.

4.3 How to Calculate Charter Capital in a Joint Stock Company

According to Clause 1, Article 112 of the 2020 Law on Enterprises, the charter capital of a joint stock company is divided into small units called shares. A share represents a small portion of the total capital of the joint stock company. A share is considered fully paid for by the shareholder to the company when it is offered for sale.

At the time of establishment registration, sold shares include the total number of shares that have been subscribed for. Offered shares are the total number of shares that the General Meeting of Shareholders decides to offer for sale to raise capital, including both subscribed and unsubscribed shares. Unsold shares can be offered for sale. In the case of company establishment registration, unsold shares are the total number of shares that shareholders did not subscribe to.

There are cases where a joint stock company can make changes:

• By decision of the General Meeting of Shareholders: The company may decide to return a portion of the capital contribution to the respective shareholders, especially when the company has been in continuous operation for at least 2 years from the date of business registration and has fully paid all debts and other financial obligations after the refund to shareholders.
• Share buyback: The company can buy back its issued shares based on a company decision.
• Failure to pay in full and on time: In case a shareholder fails to pay in full and on time, the company has the right to set a payment deadline within 10 days from the completion date of the share sale.

4.Impact of Charter Capital on Borrowing Capacity

A company’s borrowing capacity depends heavily on its charter capital. A company with high charter capital often has an advantage in raising funds from financial institutions.

Building Credibility with Financial Institutions

Banks and financial institutions often view charter capital as an indicator of a company’s financial health. High charter capital implies that the company has a better ability to repay debts, thereby building trust with these institutions when they consider lending.

Access to Capital Sources

Companies with large charter capital typically find it easier to access capital sources. Financial institutions tend to prioritize providing services to companies with high capital levels, as this demonstrates stable operations and future growth potential.

Cost of Borrowing

The amount of charter capital also affects a company’s cost of borrowing. Companies with high charter capital are often offered lower interest rates by financial institutions, which helps reduce financial pressure and enhance profitability.

A limited liability company with two or more members can increase its charter capital in the following cases:

• Increasing members’ capital contributions: The company can decide to increase its charter capital by having existing members commit to contributing more capital.
• Accepting capital contributions from new members: If a new member joins, the company can accept additional capital contributions from this member.

A limited liability company with two or more members can decrease its charter capital in the following cases:

• Returning a portion of capital contribution to members: If the company has been in continuous operation for over 2 years from the date of business registration and ensures full payment of all debts and other property obligations after returning capital to members, it can decide to return a portion of the capital contribution to members according to their contribution ratio in the company.
• The company repurchases a member’s capital contribution: According to the provisions of Article 51 of the 2020 Law on Enterprises, the company can repurchase a member’s capital contribution.
• Failure to make full and timely payment: A limited liability company has the right to reduce its charter capital if members fail to make full and timely payments, as stipulated in Article 47 of the 2020 Law on Enterprises.

>> See more: Smart Capital Mobilization Methods for Building a Strong Financial Foundation

5. Frequently Asked Questions about Charter Capital

Can charter capital be changed?

Yes, charter capital can be changed during the course of a company’s operations. However, this change must comply with legal regulations and be approved by the company’s members.

Is it necessary to prove charter capital when borrowing?

Yes, financial institutions often require companies to provide documents related to their charter capital during the loan application review process. This is to ensure that the company has the ability to repay the debt in the future.

Minimum Charter Capital for Different Types of Businesses

Minimum charter capital is the minimum amount of money a business must register upon establishment. This amount varies depending on the specific type of business.

Limited Liability Company (LLC)

For a single-member LLC, the minimum charter capital is 1 million VND. Meanwhile, for an LLC with two or more members, the minimum charter capital is 2 million VND. These capital levels are intended to ensure the company has sufficient financial capacity to operate and repay debts.

Joint Stock Company (JSC)

A joint stock company has a minimum charter capital requirement of 10 million VND. However, this minimum capital requirement is primarily intended to facilitate investors’ participation in the stock market, enhancing transparency and stability for the economic sector.

Partnership

For a partnership, the law does not specify a minimum charter capital. However, the partners in the company need to agree on the amount of capital contribution, which also helps determine the financial liability of each partner in the company.

Should you register a high or low charter capital?

Whether to register a high or low charter capital depends on the company’s financial capacity and business objectives. If you want to build credibility, easily access loan capital, or operate in a capital-intensive industry, a high capital level is advisable. However, for a small business or a startup, a low charter capital will reduce the pressure of capital contribution and financial risk. The most important thing is to ensure the ability to contribute capital on time as required by law.

6. Conclusion

Charter capital plays an essential role in determining a business’s ability to grow and raise capital. Businesses need to carefully consider the appropriate level of charter capital to optimize resources and create a competitive advantage in the market. By clearly understanding legal regulations and the factors that impact charter capital, businesses can make sound decisions to achieve their business objectives.