China Business 101: How to establish an entity in China

2020-05-27

 The most common options of setting up a business in PRC are 

 

 

Representative Office 

 

 

A Representative Office (RO) serves as an extension of a parent foreign enterprise. Since ROs are not independent legal entities, liabilities extend to their parent companies. To be eligible to establish a RO, the parent company must have been in existence for at least two years. 

 

-Why this: an RO structure may suffice in cases where a company requires an expedient option that provides surface-level local support and oversight. 

 

-Set-up cost: ROs are the easiest entities to set up and operate. The application process remains relatively simple. ROs are also relatively affordable to set up and have the advantage of not requiring the injection of capital. 

 

-IP: Limited capabilities. They cannot issue invoices, collect payments, or conduct profit-making activities. 

 

 

Wholly Foreign Owned Enterprise 

 

 

WFOE is an enterprise owned by one or more foreign investorsA WFOE is an LLC and has separate liabilities from the parent company. In comparison to ROs, WFOEs provide greater freedom in business activities and offer foreign investors 100 percent ownership and management control. 

 

-Why this: a WFOE structure may be the most appropriate investment vehicle if your business values autonomy and flexibility. 

 

-Set-up cost: The process of setting up a Wholly Foreign Owned Enterprise typically takes around 30 to 40 working days. Different types of business such as manufacturing, trading, and service can be selected 

 

-IP: A WFOE is completely owned by its foreign parent company. 

 

 

Joint Venture 

 

 

JV is a commercial enterprise entered into by at least one foreign investor and one domestic Chinese PartyHere are two common types of joint venture: Equity Joint Venture (EJV) and Cooperative Joint Venture (CJV). 

 

An EJV is a limited liability company where profits and losses are distributed between parties in proportion to their respective equity interest. Generally, a foreign investor in a JV should own at least 25 percent of total shares, the ratio is varied based on industry type. While foreign investors should note that a Chinese individual cannot normally be a JV shareholder, except in some special circumstances. 

 

A CJV is a JV structure that offers more flexibility for investors. It can operate as a limited liability company or as a non-legal entity. Further, unlike the EJV structure, profit, risk and control are not divided in proportion to their equity interests – they can be negotiated within the contract agreement. 

 

-Why this: Investors commonly opt for a JV in one of two situations. Foreign companies that want to invest in a restricted industry sector develop JVs with a Chinese partner to meet investment requirements. Otherwise, foreign companies form JVs when they want to make use of the sales channels and distribution networks of a Chinese partner. If your business operates within the restricted industry category or wishes to leverage a local partner’s existing hard assets or soft resources, the most appropriate structure may be a JV. 

 

-Set-up cost: The costs associated with setting up a JV depend on the type of JV and the capitalisation decisions of shareholders. Generally, the absolute minimum of registered capital is RMB30,000 for each investor in a company with multiple shareholders and RMB100,000 for a company with one shareholder. 

 

-IP: A JV requires a foreign company to join forces with a local Chinese business. 

 

 

 

 

 

 

 

References: 

https://uk.practicallaw.thomsonreuters.com/1-623-4945?transitionType=Default&contextData=(sc.Default)&firstPage=true&bhcp=1 

https://www.china-briefing.com/news/china-company-formation-structure-investment/