If you are considering expanding your business operations to China, it is important that you establish the right business structure for your business. This is the first step in the process to launch a successful business in China to avoid unnecessary business constraints and scrutiny from regulatory authorities in China. Not having the right business structure in place or making mistakes during the incorporation process can undermine a business’ expansion plans.
China has a large population, motivated consumers and ready infrastructure to support the expansion of many western businesses. However, expanding to this market is not free of challenges, given the complex legal, regulatory and cultural scheme of the expansive country.
To make it easier to do business in the country, many companies choose to establish a local presence through a foreign invested enterprise.
Foreign investors must be prudent when approaching local authorities and their treatment of the company’s industry, daily operations, domestic input and business objectives.
They must make specific decisions about how to manage their capital and mitigate their legal and tax liability. Strategically working with a partner like New Horizons can help a business establish a sound structure and buy the time necessary to establish a viable option in China.
Investors that wish to save time and money by creating the business structure that is most appropriate for their business should seek advice and assistance from local experts, such as those with New Horizons Global Partners.
Different Business Structures in China
Some of the business structures that you may consider for your business in China include:
Many foreign investors choose a representative office when first launching their business in China, which serves as an extension of a foreign enterprise. It takes less time and money to establish this type of office that is legally recognized in China.
Businesses often choose this option when establishing an office that will not be responsible for production, such as an office for administrators to oversee work or to conduct quality control measures. However, not all Chinese jurisdictions allow these offices to conduct this type of work.
Some businesses establish these offices to improve the communication lines between Chinese partners or suppliers with the foreign business.
Representative offices are limited in the type of work that they can perform.
It is not able to engage in profit-generating activities and cannot directly hire its own staff. This type of office is not considered its own separate legal entity. The foreign enterprise assumes all legal liability associated with it and any purchases the representative office makes are considered the property of the parent company.
Another option for foreign businesses is a sales office. The People’s Republic of China allows a foreign company to rent a local Chinese address for business purposes without the need to establish a separate legal entity.
The activities conducted at this office are invoiced and paid by the foreign company. The sales office does not directly hire foreign staff, but it can use New Horizons Global Partners for its PEO services.
This arrangement allows the business to be on the ground level in China while delegating legal liability and legal management and payroll to a local expert.
This option allows foreign businesses to enter the massive Chinese market within a matter of days, rather than weeks or months. It is also a flexible arrangement in which the business can scale up or down as needed while remaining compliant with all relevant laws.
Sino-Foreign Joint Venture
This arrangement is used when a foreign business is involved in a business venture with a local Chinese company. This establishes a separate legal entity, rather than a merger.
These business arrangements allow foreign investors to benefit from local expertise and be recognized as a legal entity able to conduct business operations in the country. These ventures can be tailored to meet the specific needs of the business.
Typically, investors form a joint venture when they want to invest in a restricted industry sector and want to partner with a Chinese business in this pursuit. Another common reason for establishing a joint venture is when a foreign business wants to take advantage of the local Chinese sales channels and distribution networks.
There are two common types of joint ventures in China:
- Equity joint venture – This is a limited liability company in which the parties divide their profits and losses between each other in proportion to their shares. A foreign investor in this type of arrangement can usually own up to 25% of the total number of shares. Chinese individuals typically cannot be joint venture shareholders, but there are a few exceptions.
- Cooperative joint venture – This joint venture structure can be a limited liability company or operate as a non-legal entity. Profit, risk and control are not divided according to the partners’ equity interests and instead are subject to the terms of the contract. Therefore, this type of joint venture offers greater flexibility to foreign investors.
Foreign Invested Partnership
This unlimited liability business entity is able to be established without the minimum capital requirements required of other types of business structures in China. Two or more investors enter into an agreement to form this type of business structure.
While there are guiding laws for this type of entity, there is also a lot of discretion allowed to the investors to be able to form an agreement that will be respected if challenged. One drawback of this model is that foreign investors must assume more liability.
Wholly Foreign Owned Enterprise
A wholly foreign owned enterprise is owned by one or more foreign investors and is completely autonomous. It has all of the legal recognition and liability as a domestic company. Therefore, this type of business structure has its own separate rights and responsibilities.
It can enter into legally binding contracts.
Business partners may set up this entity as a limited liability company in which each partner’s respective degree of liability is limited to the amount of capital they each contributed. This type of business structure provides foreign investors with complete ownership and management control.
China generally recognizes the following types of wholly foreign owned enterprises:
- service or consulting
These broad categories dictate the setup procedures, minimum capital requirements, costs and the possible commercial activities that the business can engage in.
Role of PEO with Company Incorporation
A professional employer organization can assist with hiring staff if you have restrictions on this aspect due to your business structure selection. Additionally, we can provide ongoing assistance with your staffing and payroll needs.
If you are interested in establishing a foreign business in China, it is critical that you select the most appropriate business structure.
This requires you to think carefully about your potential business strategy and pair with a local expert such as New Horizons Global Partners who can explain the legal requirements. Our local experts can guide you through the process of selecting the most appropriate investment vehicle so that you can complete your commercial objectives.
We can discuss the benefits and risks of each possible business structure and provide ongoing advice and support throughout the process. Contact us today to find out more about how we can help.