If you are considering setting up a business in China, or doing business with Chinese companies, then you should understand the different types of business structures works in this country. The more you expose yourself about Chinese laws and regulations, the more success you will have conducting business in the country. Below are the common types of business entities in China both for Chinese natives and foreign investors.
1. Wholly Foreign Owned Enterprise (WFOE)
WFOE refers to a company in China that is solely established by foreign parties, and that does not have direct involvement of a mainland Chinese investor. WFOEs may be able to receive preferential policies such as tariff exemptions for imported equipment, or tax incentives. It is currently the most popular form of incorporation for foreign companies in Mainland China as it allows them complete control of their operations.
2. Joint Venture (JV)
JV is a special form of company registration in China where there is both a mainland Chinese party and a foreign party, namely, limited liability companies formed between a Chinese company and a foreign investor (the latter of which can be a company or an individual). Both parties contribute investment, then share the revenues, expenses and control of the enterprise. In restricted industries a JV may be your best option.
3. Representative Office (RO)
RO is technically not allowed to generate revenue or enter into contracts with businesses in China. This entity is intended to allow overseas companies a base in China for networking, conducting market research, promotion and other non-revenue generating activities. It requires no registered capital. Therefore, opening a representative office is a reasonably simple way for a foreign company to have a limited presence in China.
4. Partnership Enterprise (PE)
PE, Similar to a JV, allow two or more foreign enterprises or individuals to do business together in China. It requires no approval from the Ministry of Commerce and no capital verification report, which means there is no minimum capital requirement. Additionally, such enterprises don’t have to pay business income tax, which substantially reduces the cost of investment.
5. State Owned Enterprise (SOE)
A SOE is a legal entity that undertakes commercial activities on behalf of the state, its owner. TIt can be either wholly or partially owned by a government and is typically earmarked to participate in commercial activities. The defining characteristics of SOEs are that they have a distinct legal form and are established to operate in commercial affairs and commercial activities. While they may also have public policy objectives, SOEs should be differentiated from other forms of government agencies or state entities established to pursue purely nonfinancial objectives.
6. Private Enterprise
A private enterprise is a company registered by an individual, group of individuals or even other companies without any government ownership. The most popular form of company registration in China, the rise of private enterprise has been largely responsible for transforming China from the bleak past of inefficient state controlled monopolies and government handouts to a high-growth, vibrant modern economy.
7. Privately/Individually-owned Business
Privately/individually-owned business is the simplest form of company registration in China, and is primarily used for very small companies. As the name suggests, it is a company form in which the company is owned by only one individual, who must be a Chinese national. It can be understood to be China’s equivalent of a Sole Trader and is a common form of registration for Chinese individuals operating a simple business such as a basic restaurant or a shop.
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