May 19, 2019

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Business Organizations in China

There are two basic types of business organizations in China. In addition to locally incorporated companies of the two basic types, there are several types of business entities open to foreign investors.

Limited liability company – Limited liability companies are comprised of shares with a minimum share capital of at least RMB 30,000. In order to satisfy the minimum capital requirement, cash or property whether owned or leased from the state can be put up.

Company limited by shares – A company limited by shares is also comprised of shares and must have a share capital of at least RMB 5 million. A company limited by shares must be established by way of a promotion or offer of shares subject to permission by China’s regulatory authority.

Business entities for foreign investors

Foreign investors wishing to incorporate a business organization in China can choose from several business structures, but must bear in mind factors such as the industry in which their business will operate and the amount of capital they are willing and able to put up.

Cooperative joint venture – In China, a cooperative joint venture between a Chinese entity and a foreign investor affords the possibility of limited liability protection to an individual investor. The business structure offers investors the choice of running the business as a limited liability company or of forgoing incorporation and exposing investors to unlimited liability.

Profit sharing takes place in accordance with the terms set out in the joint venture agreement. After the objectives of the agreement have been carried out or concluded, a foreign investor can then step out of the picture by returning full control of the business to the Chinese entity.

No incorporation or fresh business licenses need be obtained in such situations, nor are any time limits imposed on the duration of such joint ventures. There is no requirement that the foreign investor contributes money towards the joint venture and other forms of capital contribution are acceptable. Investments can be withdrawn or transferred at any time.

Equity joint venture – An equity joint venture must be incorporated as a limited liability company. Profits are distributed in accordance with the proportion of capital put up by each investor. The foreign investor must have at least a 25% stake in the registered capital, which is not limited to financial capital.

If the level of foreign investment is less than 25%, the foreign investor is required to put up the remaining capital within three to six months depending on whether the investment is in the form of cash or other forms of capital.

Wholly foreign-owned enterprise – Such an entity is wholly owned by foreign investors and requires incorporation as a limited liability company. Such entities are usually subsidiaries of foreign-owned companies and as such are subject to minimum capital requirements.

Representative office – A representative office of a foreign-owned company is allowed to engage in certain business activities in China such as marketing research and liaising with partners. Representative offices are however not allowed to manage or participate in any business transactions.