One of the most significant things about doing business in China is selecting the appropriate company type.
According to Chinese legislation, there are three primary company structures through which foreign investors can establish a presence in China. These company structures include:
- a Wholly Foreign-Owned Enterprise (WFOE or WOFE),
- a Joint-Venture (JV) and
- a Representative Office (RO).
Each has its own qualities and difficulties, but the right choice depends on your goals and strategy.
The WFOE vs Representative vs Joint-venture in China
- Wholly Foreign Owned Enterprise: WFOE is a privately owned limited liability company in China in which all the shareholders are foreign.
- Representative Office: a representative office is a base from which to manage affairs and attend meetings in China.
- Joint Venture: joint venture implies starting a company in China with at least one foreign and one local shareholder.
The Wholly Foreign-Owned Entity (WFOE)
A Wholly Foreign-Owned Enterprise is the most popular and chosen company structure for foreign investors and entrepreneurs in China. A WFOE is a Limited Liability Company that is established solely through a foreign investor’s capital.
Features of a WFOE
- A WFOE is a separate legal entity and as an LLC, the liability for the foreign investor is restricted to the amount of registered capital provided by its shareholders.
- The shareholders of a WFOE must contribute an amount of registered capital to the company, but, the law does not specify a required minimum.
- A WFOE can engage in any commercial activities provided that these business activities are not part of the “Negative List”.
- The WFOE can hire both foreigners and local Chinese employees directly without restrictions on the hiring procedure.
The minimum investment required to set up a WFOE
Since the Company Law update in 2014, minimum registered capital indications have been eliminated, with no minimum investment to set up a WFOE given that the company activities do not involve one of the regulated industries.
When venturing alone in China, it’s important to understand that different municipalities and regions suit different types of industries.
Different types of WFOEs in China
We can distinguish between three types of WFOE, namely:
- The Consulting WFOE: this type of WFOE is licensed to operate as a consulting business within the service industry.
- A Trading WFOE: this type of WFOE is licensed to conduct trading, retail, and franchising activities in China. It can additionally apply for a customs license to independently import/export goods in/from China.
- Manufacturing WFOE: the manufacturing WFOE can legally engage in manufacturing and assembling processes.
Incorporating a WFOE
The standard process of setting up a WFOE involves two main sections of activities: pre-registration and post-registration.
- Pre-registration: this section involves the submission of several business-related documents including passport copies of investors or notarized documents of the controlling entity.
- Post-registration: this stage requires companies to formally register with the applicable Chinese government agencies using the Business License given by the local Administration for Industry & Commerce.
The WFOE can be set up within 2-5 months depending on the business scope.
Joint Venture (JV) in China
Comparable to a WFOE, a Joint Venture is an LLC, but, it is founded through a partnership between a foreign investor and a Chinese company or individual.
There are two primary types of Joint Ventures in China:
- Equity Joint Venture (EJV): this is an autonomous legal entity with limited liability. Profit and risk sharing in an EJV are proportional to the equity of each partner.
- Co-operative Joint Venture (CJV): its profits are divided according to the terms of the co-operative venture contract, which offers greater structural flexibility over an EJV.
Features of a Joint Venture in China
- As the management of a Joint Venture is more sophisticated due to the involvement of numerous shareholders with diverging interests, the shareholder agreement plays an important role in establishing the rights and responsibilities of the parties involved in the partnership.
- In a Joint Venture, the investor’s liability is limited to the amount of registered capital they provided respectively.
- Joint Ventures can engage in any commercial activities in China.
- A Joint Venture can hire both foreign and Chinese employees without direct restrictions in the hiring process.
The minimum investment required to set up a Joint Venture
There is no minimum investment requirement for Chinese partners in a JV, but China’s EJV Law requires that the foreign party contributes at least 25% of the registered capital.
A JV can take up to 5+ months to set up.
The Joint Venture structure is often used to access areas of business in China that are restricted or prohibited by Chinese regulations.
A Representative Office in China
A Representative Office serves the main purpose of market promotion and liaison for foreign-invested commercial companies in China.
The specific functions of RO include technology exchange, target market research, and product promotion.
A RO is an individual and independent entity that holds no legal rights of its own and doesn’t possess full economic functions to conduct commercial activities.
The minimum investment required to set up a Representative office in China
There are no registered capital requirements for a Representative Office but its expenses are conducted through the remittances of the overseas parent companies.
The limitations of a representative office include the incapacity:
- to sign contracts with customers or suppliers using its name,
- to hire staff independently,
- to request the qualification of a general taxpayer, and
- to apply for an independent import/export license.
But, the representative office registration process is simpler than that of WFOE.
In general, a RO holds the status of a physical office and facilitates the activities of Foreign/Chinese staff deadlines with distributors, agents, and suppliers of the parent company. The RO can be set up within a few weeks.
Conclusion
When foreign investors and entrepreneurs are considering establishing a company in China, deciding on the ideal company structure is important, and making a choice will depend on several factors such as the intended business activities and industry in which the investor wishes to operate.
Thus, foreign investors should carefully consider the legal restrictions of the various company structures before establishing a presence in China.
Are you ready to take the leap and enter the Chinese market? – Let’s go ahead and contact your Damalion expert now.
