Venturing into the China Business Scene – Company Legal Structure and Incorporation Requirements

With previous articles delving into the different regions available in China for varying business nature and the enhanced Foreign Direct Investment (FDI) regulations in Shanghai, choosing the legal structure and preparing the required documents are the next steps for entrepreneurs or companies looking to venture in to China’s business terrains. 

Corporate Structures for Foreign Companies

There are several options for a company entity to operate for foreigners depending on their business needs. Some offer more ownership controls, while others offer cost-effective advantages and provide more opportunities for foreign enterprises. The preferable business structures include:

1. Wholly-owned Foreign Enterprise (WFOE/WOFE)
Under the WFOE/WOFE structure, it is a Chinese registered company 100% owned by foreign investors (individual or corporate). The WFOE/WOFE entity type provides the following advantages:

  • As a limited liability company (LLC), it separates the legal entity and limits the owner’s liability to the contributed share capital
  • Independent management of operations, funding, and business development in China
  • Without a parent company, it is not required of the business to share profits, strategies, or Intellectual Property (IP)
  • Ability to issue local currency invoices to domestic customers, and profit from its activities
  • Able to manage human resources and hire of staff (both local and foreign)
  • Have a certain level of Intellectual property rights (IPR) under Chinese law


2. Joint Venture

A joint venture incorporates most commonly in the form of a limited liability company (LLC) created through a partnership between a foreign-invested enterprise (FIE) and Chinese investors, who share the costs, rewards, and the management of the joint venture. It can be further classified into two main groups – Contractual or Cooperative Joint Venture (CJV) and Equity Joint Venture (EJV). However, under the new foreign investment law with effect from January 1, 2020, distinctions between the EJV and CJV have been abolished. There will be a five-year transition for the existing joint ventures to restructure.

Under the new joint venture, foreign entrepreneurs will reap the following benefits:

  • Accessibility to the business sectors which are restricted (not prohibited) in equity ownership terms by the Chinese government
  • Obtain insights from the local partner’s business experience and practices in China
  • Tap on the partner’s existing channels for sales and distribution
  • Enjoy local treatment when participating in official and public tenders


3. Representative Office (Rep Office/RO)

As the most straightforward and quickest option for overseas companies to set up, the corporate structure allows foreign businesses to conduct market research and business operations in China – not to generate revenue. Yet, choosing a representative office have its merits, such as:

  • Carrying out non-profit making business activities and gathering market intelligence in China
  • Reduced cost and risk due to no minimum capitalisation (With new regulation implementation, no minimum capitalisation is required for WFOE, but in practice, capital injection is needed and can be difficult to extract)
  • Lower tax and administrative work
  • The hiring of local and foreign staff with the condition of employment and payroll processed by a Chinese agency

 

Required Documents for Company Incorporation

Knowing the basic requirements to form a business in China is key to preparing necessary documents and ensuring no application submission delay. As a new entrant to venture into the Chinese market; the following documents need to be submitted:

  1. Company Name

It is necessary to seek approval from the Administration of Industry and Commerce to ensure the company name does not conflict with existing operating businesses.

  1. List of Controlling Partners

The list should consist of shareholders who hold the majority of shares in the incorporating company. It is advisable to confirm business partners are allowed to hold shares in China.

  1. Managerial Structure

A complete business operational profile includes the board of directors, supervisors, general manager, and the legal representative, accompanied by passport copies of the directors.

  1. Legal Address

The incorporating company should provide an official company address, phone number, and email to the authorities for contact purposes.

  1. Articles of Association

The Articles of Incorporation or Organisation is a crucial document during the company registration process in China. It outlines the business’s core details, including the managerial structure and ways to return profits.

  1. Registered Capital and Total Investment

Resources dedicated to meeting the operating expenses are registered capital, and the total investment is a sum of registered capital and future loans from investors or banks.

  1. Feasibility Study

It is essential to submit a comprehensive and convincing business proposal and a budget demonstrating the registered capital can finance the operations. A substandard feasibility study document may affect the approval of the company registration by the authorities.

  1. Other Documents
  • Copies of applicable business licenses
  • A certificate of good standing
  • A bank approval letter

Do note to prepare a set of the documents mentioned above in the Chinese language.

 

Engage a Company Formation Professional

The Chinese market may seem highly rewarding – it is equally complicated, especially for foreigners. It is highly advisable to engage experienced consultants to devise a strategic market entry plan for company incorporation in China.

With more than a decade of experience in company incorporation, Desfran is involved in every step of numerous businesses’ expansion journey. From micro to multinational companies, we have the expertise to assess current markets and assist foreign firms in navigating cultural differences.

Contact Desfran Now for a Free Consultation.

 

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