Culturally and legally, corporate investments in China are complex. It is vital to understand what sort of corporate structure to use. The right business entity can in some instances reduce costs and help the business cope with massive amount of regulations.
Chinese authorities may treat particular industries differently. And for every business venture in China, extensive and careful business planning must take place. Mistakes could prove costly and even prevent the venture from moving forward.
The options that are in place
Some options that an investor may consider before doing business in China include:
Registering a Representative Office: Such registration helps investors obtain a better understanding of the Chines market. But such an entity also has limitations. Under Chinese law, a Representative Office cannot engage in profit-seeking activities. Legally, a Representative Office can only involve itself in market research, publicity activities relating to the products or services, and various contact activities.
Creation of a Wholly Foreign Owned Enterprise (WFOE):A WFOE is something owned by one or more investors. Such an entity has rights and obligations under Chinese law including the right to own property and ability to enter into contracts. Investors often operate these as a form of limited liability company. Investors due that to limit the liability they face to their own capital contribution. A WFOE provides a wider variety of freedom than does a Representative Office. It also offers foreign investors 100 percent management and ownership control.
Formation of a Sino-Foreign Joint Venture (JV):This venture involves a minimum of one foreign investor with a Chinese partner. It is not a merger. Rather, it is the formation of an entirely new legal entity. Such a JV can be in the form of an Equity Joint Venture or a Cooperative Joint Venture. An Equity Joint Venture limits liability to a party’s equity interest. In a Cooperative Joint Venture, parties can contract concerning profit, liability, and control.
Forming of a Foreign Invested Partnership (FIP): This involves an “unlimited liability” company set up without any capital requirements. It also involves investors forming a partnership for commercial purposes. The Partnership Enterprise Law governs the operation and set up of such an arrangement. However, laws allow for FIPs tremendous discretion when it comes to forming agreements.
As this is only a short summary of the available entities, discussing your business goals with someone who understands Chinese laws and business customs is extremely important. Choosing the right entity and investing your dollars in a business entity correctly could depend on receiving the right sort of advice.