What are the Main Types of Company Formations in China

For about three decades, China has stood out as one of the most stable jurisdictions in the globe.

This, coupled with the government’s pro-business approach, has made the country a high-potential jurisdiction for foreign investments. This is why it has become the leading manufacturing hub in the globe. Furthermore, investors in China can easily export and import to different countries because of many bilateral trade agreements with different countries.

To take advantage of the supportive business environment, you need to take the first step: selecting the right business format. In this post, we will tell you about the three main types of businesses that you can incorporate in the People Republic of China.

Wholly Foreign-Owned Enterprise (WFOE)

WFOE is a type of company structure where the foreigner owns 100% of the shares. This means that you have total control on the business decisions, from who to hire to the expansion policies.

Because most WFOE companies take the form of limited liability companies, it implies in the event of a problem such as loss or bankruptcy; your liability is only limited to the shares you have in the company.

Therefore, no one will come for the money in your personal account or other assets. WFOE is the most preferred form of business by foreigners in China.

Joint Venture

A joint venture is the opposite of the wholly foreign-owned enterprise (WFOE) in China. While you are allowed to have 100% shareholding in a WFOE, a joint venture requires you to enter into a partnership with local residents and register a limited liability company. Further, you are only allowed to hold no more than 49% of the company shares, while the Chinese partner takes 50+%.

When you go for a joint venture, it means that you cede control of the company to your Chinese partner. Well, this is indeed very risky because you do not have control over the company even in the event of poor management. But there is also a bright side.

Since you are joining hands with a local partner, it is an opportunity to penetrate the Chinese market faster by using his networks. Therefore, you are sure of faster growth and success.

Representative Office

A representative office is another common type of business formation in China. But a representative office is completely different from a joint venture or wholly foreign-owned enterprise because it does not allow you to carry any business activity. This is why most companies that open representative offices in China are largely interested in offering support or carrying market research.

Notably, the representative office is considered fully housed under the parent company back at home. Therefore, the foreign company is fully responsible for office operations and employment liabilities.

When you decide to incorporate your business in China, picking the right formation determines the extent of control that you will have when the operations start. Therefore, it is important to compare and contrast the different formations and select the ideal option. Further, you should consider working with professionals who have ample experience working in China to help you with business incorporation and early establishment.