China Company Formation: Which is the Right Entity for You?

You have probably heard the phrase, “the land of the rising sun and new opportunities,” when people describe Japan, but everything is now turning to China. For more than 40 years, China adopted aggressive reforms that have progressively seen its economy proliferate to have the world’s largest GDP when measured by Purchasing Power Parity (PPP). This momentum is still building, and you can take advantage of it by opening an offshore company in China.

If your company’s growth is not as rapid as you would expect, or it is simply operating in the red as far as the profit margin is concerned, China might be the way out for you. The country has a population of more than 1.4 billion, which is more than most businesses would need to skyrocket their profitability.

If this is not enough, the Chinese administration has a raft of incentives, such as a straightforward tax system and incubation programs for high-potential ideas. Simply put: China is a complete package for a business that wants to accelerate into a multinational. To get into this all-important jurisdiction, the one most important requirement is China company formation.

In this post, we take a closer look at China company formation to highlight the main types of companies you can form in the jurisdiction. Do not get content with your company’s poor performance back home; leverage it to success by going offshore.

Wholly Foreign-Owned Enterprise (WFOE)

If you aim to maintain direct control over your company in China, the formation to go for is a wholly foreign-owned enterprise (WFOE). You might also get it in some quarters being called WFOE. This legal entity is structured as a limited liability company with the owners being foreigners only. This means that you can do profitable business activities in China with clients, customers, partners and even enter into agreements with third parties.

The most notable benefit of using a WFOE is that it gives you absolute control over the management of the enterprise. Unlike a joint venture (JV), as we will highlight shortly, no partner will be required to be consulted when hiring staff, developing products, or making the critical strategies in a WFOE. And now onto the best part: you do not need to share profits with partners. To know more about WFOE, click here.

Joint Ventures (JVs)

This is the most complex form of business entity in China. The complexity comes from the fact that you must work with a Chinese partner. Indeed, even the structure of the JV is pretty complex because the Chinese partner is required to hold higher shareholding than the foreigner. This implies that you have little control over the running of the company.

The main advantage of a JV is that you can rapidly grow the enterprise by using the networks of the local partner. Furthermore, it might be possible to access business areas, which would otherwise have been impossible when approached by a foreigner alone.

We must indicate that following the passing of the Foreign Investment Law, the Chinese administration is discouraging the JV structure. Therefore, you had better work with an agency of experts to ensure your company is appropriately formulated.

Representative Office (RO)

A representative office (RO), just as the name suggests, is a company that operates as an extension of the mother company back home. Although simple, it comes with severe limitations because you cannot engage in profitable activities. Therefore, it is recommended for activities such as marketing and when scouting for partners.

Once you select the preferred China company formation, the next step is registering it. This is where things get complex and tricky. For example, you need to deal with multiple offices, traveling from one to another, do feasibility studies, and prepare a host of other documents.

The good thing is that you can simplify the process by working with a professional agency of experts. They are experts in areas of company registration and can also help with other tasks, such as payroll management and filing returns.

Company Limited By Shares

In these companies, the shareholder liability to the company creditors is restricted to the actual capital amount. However, the personal shares of shareholders are protected in case the company goes bankrupt. This norm will apply to both public and private assets belonging to the shareholder.

A company that is limited by shares must have a board of directors comprising 5-19 members. There is also the FICLS, which is a foreign company limited by shares. Foreign investors are allowed to set up such firms, and these are the only foreign exchange companies permitted to be put up on the Chinese Stock Exchange market.

State-Owned Enterprises (SOE)

An SOE takes control of a business and its commercial operations on behalf of its actual owner. Until very recently, an SOE was a very exclusive and dominant corporate structure in China. However, the business reformation movements of 1980 allowed the Chinese business landscape to be wide open because previously, everything was essentially in control of the government.

SOEs still exist in China, but they operate in crucial industries like electricity, telecommunication, aerospace, etc. Since these sectors are considered the most important by the Chinese government, SOEs only exist here. The legal status of such firms varies from being a part of the government to a stock market.

Private Enterprises

The private enterprises saved the Chinese economy from the mountainous control of state-owned enterprises. It then hurled them back to become part of the growing global economy. That is why private enterprises are also known as civilian enterprises or non-state-owned enterprises. These companies are operated by a group of individuals without any governmental authority.

Private enterprises are majorly responsible for bringing in foreign investors to the country. As the economy of China mainly consists of a socialist market, foreign investors did not use to invest here. But, since the rise of private enterprises, China’s foreign direct investment rates have risen.

Conclusion

We have described here what kinds of companies operate in China. This article will give you a clear overview of the Chinese economy and its business landscape. A Chinese firm’s business license is the only document to validate which type of company it is.