Most law firms translate Chinese corporate entity names in a way that hides the true nature of the business entity. American companies often complain that they encounter dishonesty and fraud from their business partners, but their own translators are misleading them even when it comes to the most basic business information. Historically, dictionary writers in China copied corporate entity translations from an 1880s Japanese-English dictionary, which had never been updated despite the many changes to both Chinese and American corporate law since then. In this article, we will go through the two major kinds of corporations that exist under Chinese law and the distinctive elements that, if properly recognized, could save companies millions of dollars.
Surprise: China has LLCs
Numerous companies doing business in China have signed contracts with a Limited Liability Company (LLC), likely without ever being aware of it. Youxian Zeren Gongsi, the Chinese entity enabled by the 1994 Company Law, literally translates as “Limited Liability Company” to Chinese, word-for-word. However, it is nonetheless mistranslated as “Company Limited” due to an outdated dictionary entry created over a hundred years before the entity type even existed. So much so, that the mistranslated term has now become a standard translation provided by the machine translation programs responsible for almost all Chinese document translations for corporate counsel today.
The Chinese LLC is essentially a more logical and optimized equivalent of the Delaware LLC and, through diplomatic engagement, the IRS even created a tax regulation determination to treat it as an LLC. Perplexingly, China’s C-Corporation equivalent is still usually translated as “Company Limited,” but is treated as a corporation under federal regulations. The main difference between LLCs in the US and China is that LLCs in China cannot elect to be taxed as partnerships. Unsurprisingly, only partnerships can elect to be taxed as partnerships in China, because the Chinese LLC is an evolution that learned from the experience of its American counterpart. For this reason, we always translate any such entities as a “Limited Liability Company,” since the general counsel’s staff deserves to know exactly what these LLCs and Corporations are.
General counsel should be aware of substantive differences between LLCs and Corporations. Updates to Chinese business entity regulation now permit an LLC to operate as a shell company. This has shifted the know-your-customer due diligence from business registrars to financial institutions. Instead of drowning every small LLC venture in red tape, Chinese regulators have taken to aggressively warning investors about the high possibility of fraud from shady LLC business partners operating shell companies. As the State Administration for Market Regulation warns:
“A Xinhua News Agency reporter’s investigation revealed that most fraudulent companies are legally registered with the State Administration for Market Regulation, and their business licenses record a registered capital of between 30 and 50 million Yuan, despite having a paid-in capital of 0 Yuan.
[…] Officials say that shareholders of general companies, excluding companies in certain industries such as banks, financial institutions, securities and futures companies, and fund management agencies, may independently decide how much, when, and how they contribute paid-in capital.
“Therefore, these “unfunded companies,” whose shareholder paid-in capital totals 0 Yuan, do not violate applicable law,” said the official.”
Source (in Chinese): “Investment Fraud Committed by Unfunded Companies”
Chinese regulators now want you to take responsibility for fully understanding the business of any enterprise with whom you get involved. Corporate general counsel offices often turn to us for help translating incorporation documents for Chinese LLCs, which include a line for the entity’s “registered capital,” and tend to be surprised when we share a quote that states that the registered capital amount for an LLC is essentially meaningless. On their end, their advisors in China simply sent them documents without explaining what they really meant because they are working for a fixed fee and want to be as fast as possible. Consequently, their investors put a lot of money into fraud schemes under the impression that they were solid. Investors’ lack of insight has led top legal authorities in China to caution that the registered capital amount you see on such documents is no indication of your business partner’s creditworthiness. Lu Jianping, Beijing Normal University Law School Dean explains:
“Registered capital is merely an accounting figure and only indicates that the shareholders have performed their investment obligation to the company pursuant to the agreement. Therefore, a company’s registered capital generally does not reflect its creditworthiness.”
“False Declaration of Registered Capital” (in Chinese)
Not only is the company potentially not creditworthy and possibly a vehicle for a clever scam, but the Chinese legal translation itself may be a fraud technique. In the past, I have seen criminal fraud schemes where mistranslated entity names caused investors to wire money to the wrong entity’s account to facilitate money laundering. For a hypothetical example, fraudsters are well aware that a typical Chinese legal translation agency will translate the names of both “Baidu Corporation” and a sham company “Baidu LLC” to “Baidu Company Limited.” Therefore, both the investor and their bank’s wire department will have no way to tell the entity names apart when wiring funds. Proper due diligence with findings and risks described in precise, correct English is the only way international companies can adequately protect themselves when entering into at-risk contracts with LLC companies in China, where authorities warn of these high fraud risks.
China’s more well-funded and reliable business entity is the Stock Corporation, and a general counsel familiar with the Delaware Stock Corporation entity should be advised of the significant improvements China has made over the Delaware Stock Corporation, which are explained in the following section.
LLCs vs. Corporations: In China it Really is Different
At a conceptual level, regulators in China envision LLCs being managed much like a partnership, whereas Corporations are expected to be operated as a separate entity through shareholder votes. Judge Ye Guoping explains:
“A major difference between a limited liability company and a corporation is that the formation of a limited liability company is based on mutual trust between the shareholders, even though a limited liability company is technically a joint-stock company […] Limited liability companies have limited numbers of shareholders and their shares can neither be sold through public offerings nor traded on public exchanges.”
“On the Exercise and Protection of Shareholders’ Right of First Refusal” (in Chinese)
In a study on shareholder oppression in limited liability companies (in Chinese), researchers found that, “Unlike corporations, which have joint stock structures, limited liability companies’ structures depend on the personal relationships between their shareholders as they tend to be formed by groups of friends or relatives who share profit and loss.”
Not unlike other jurisdictions, your LLC business partner is generally either going to be a subsidiary shielding its liability from the parent company or a small business operated by a group of friends, or even a sole proprietor. General counsel offices and executives assessing investments should be made adequately aware of the business entity structure of their business partners, or risk discovering that their China ventures suddenly begin losing a lot of money. While the typical Chinese legal translation company feels their role is limited to checking a Chinese dictionary and churning out nonsense, our team believes that these essential meanings should not be obscured in legal translations.
Heightened Regulation: China Corporations
In 2017, China’s Securities Regulator issued regulations that introduced the British concept of Public Limited Companies to strengthen the regulation of public companies in China, a distinction that does not exist in corporate law. The Shenzhen Stock Exchange issued a bulletin (in Chinese) describing the changes:
“When the Unlisted Public Limited Companies Oversight Procedures (the “Oversight Procedures”) take effect, a corporation having over 200 shareholders may choose to either become a listed company by IPO or an unlisted public company through public share transfer, private placement, or private share transfer. Therefore, any organizations having over 200 shareholders after the Oversight Procedures take effect will be considered public companies.”
Our translation above seeks to highlight the diverging approach taken by Chinese corporate law on one hand and securities law on the other. While owners of Stock Corporations registered in popular jurisdictions such as Delaware or Nevada are generally not required to make investor disclosures, like a publicly traded corporation on the New York Stock Exchange might, the regulator in China says it intends for most successful corporations to be making these disclosures:
“Although China’s Company Law lacks the concept of a public company, companies that publicly issue shares are required to continuously perform their information disclosure obligations pursuant to the requirements for publicly issued shares under the Securities Law […] In essence, an unlisted public limited company refers to any company that publicly issues shares but whose shares are not listed on stock exchanges. Notwithstanding, such companies are required to continuously fulfill their information disclosure obligation, as they have publicly issued shares and differ from listed companies since their shares are unlisted cannot be traded on stock exchanges.”
Conclusion
Chinese legal translation services for law firms routinely obscure whether an entity in China is a Corporation or an LLC. However, as we explained above, these two terms create a material difference. Simply put, an LLC is generally going to be a small business or a subsidiary, and they are even permitted to be shell companies. Corporations are subject to heightened regulation. Nevertheless, investors in China should be greatly worried that their translators likely can’t tell the difference between the two and translators will assign the same exact English name to separate entities that have different Chinese names.
When vetting potential translation company partners, general counsel offices should consider whether the Chinese translation agency has knowledge of the distinction between LLCs and Corporations in China and should verify the lead translator’s knowledge with a phone call after verifying their certification in the ATA Directory. Most clients are often surprised to find that legal translation rates for qualified Chinese translators are actually quite reasonable, even when compared to rates charged by dishonest translation agencies.
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