Once a business decides their next endeavor is the Chinese market, the next logical step is deciding how to do it. For some, the best course is to set up a separate business organization in China. Below, we outline the most common legal structures for foreign-invested business in China.
What legal structure works best for a business in China?
China’s laws on corporations recognize two types of companies: Limited Liability Companies (LLCs) and Joint Stock Limited Companies. Joint stock companies can sell shares to raise capital, but they are subject to more compliance requirements than LLCs.
Companies with a foreign investment element often choose to organize as an LLC, as they offer several advantages:
Since an LLC is, for legal purposes, a “person,” it can own property and claim ownership of intellectual property assets. This can make navigating China’s intellectual property regulations a little easier.
Fewer regulatory obstacles
LLC registration in China is generally easier than that of a Joint Stock Limited Company. Plus, there are fewer compliance requirements for LLCs.
Just like American LLCs, shareholders and owners of an LLC in China can protect their personal assets from liabilities or debts of the company.
Do you need to form a WFOE?
Many looking to do business in China have probably heard of a Wholly Foreign Owned Enterprise. In the simplest sense, this is an LLC owned entirely by foreign investors.
For some business ventures, this step is necessary to do business safely in China. One situation where a WFOE is legally necessary is if your business plans to have employees in China. However, the process is complicated and expensive, and business owners should consult with an attorney experienced in Chinese business practices before forming one.