As the new Company Law comes into effect in 2024, the system of registered capital for companies has undergone a series of transformations, offering entrepreneurs more flexible and diverse choices. From July 1, 2024, the new Company Law requires that registered capital be fully paid up within five years. When considering the method of contribution, business owners often face a dilemma: should they choose to contribute in cash or through borrowing? Below is a detailed analysis of these two methods of contribution that you must understand.

I. Pros and Cons of Cash Contributions

Cash contributions refer to the shareholders actually paying cash, goods, intellectual property, or other forms of assets to the company according to the amount and timeline stipulated in the company's articles of association. The advantages are:

1. Enhancing Company Credibility

Cash contributions can demonstrate the strength and credibility of the company, which is a positive signal for partners and customers, helping to enhance market competitiveness.

2. Simplifying Shareholding Structure

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Cash contributions make the company's shareholding structure relatively clear, avoiding the complex debt relationships that may arise from borrowing.

3. Avoiding Debt Risks

Funds from cash contributions belong to the company's own capital and do not involve external debts, thus they can help to avoid certain debt risks during the company's operations.However, there are certain risks associated with paid-in capital:

1. Financial pressure

For startups, paid-in capital may bring significant financial pressure, affecting the company's operations and development.

2. Liquidity risk

After paid-in capital, funds will be transformed into the company's fixed assets or operating funds, reducing liquidity, which is not conducive to dealing with emergencies.

Many bosses originally registered their companies with a large amount of registered capital, and now they are having difficulties in completing the paid-in capital, so they are considering reducing the capital. Reducing capital is also a good choice. In the future, if the company's operating funds are insufficient, it is actually possible to increase the capital again. Some bosses inject funds into the company through borrowing to meet the company's operational funding needs. The following is about the pros and cons of borrowing capital.

II. Pros and Cons of Borrowing Capital

Borrowing capital refers to the company obtaining funds as registered capital by borrowing from banks or other financial institutions.

The advantages are:1. Financial Flexibility

Borrowing to finance can maintain the liquidity of a company's funds, facilitating the ability to meet the financial needs arising from day-to-day operations.

2. Financial Leverage Effect

By borrowing to finance, a company can utilize the financial leverage effect to amplify the use of its own funds and enhance the return on investment.

However, borrowing to finance also has distinct disadvantages:

1. Debt Pressure

Borrowing to finance will increase the company's debt burden, necessitating the payment of certain interest expenses, which increases operating costs.

2. Complication of Equity Structure

Borrowing to finance may lead to the complication of the company's equity structure, introducing external creditors and adding to the difficulty of corporate governance.

3. Credit Risk

Borrowing to finance can expose the company to credit risk, as it becomes more susceptible to changes in interest rates and market conditions, potentially affecting the company's financial stability and reputation.If a company is unable to repay its debts on time, it will face the risk of credit loss, which can affect the company's long-term development.

III. The Difference Between Paid-in Capital and Borrowing

By way of paid-in capital through registered capital, if a company makes a profit and wants to distribute it to itself, it must pay a 20% personal income tax, and this is after first paying a 25% corporate income tax, followed by the 20%.

By lending to the company, one becomes a creditor of the company and can demand that the company pay interest according to the loan. The paid interest can also be deducted from corporate income tax. There is a difference of 40% between these two methods.

Therefore, when choosing between paid-in capital and borrowing, business owners need to consider the company's actual situation, industry characteristics, market environment, and other factors comprehensively. For enterprises with strong financial strength and sufficient confidence in future development, paid-in capital may be a better choice, which can enhance the company's credibility and market competitiveness.

For start-ups or companies with tight funds, if it is difficult to complete the paid-in capital, they can consider reducing capital or borrowing to alleviate financial pressure and maintain the flexibility of funds.

In summary, under the framework of the new company law, business owners need to carefully weigh the pros and cons when choosing the method of capital contribution, and make wise decisions in line with the company's actual situation. At the same time, no matter which method of capital contribution is chosen, it is necessary to ensure the company's financial stability and sustainable development.

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