What Are Types of Chinese Business Entities?
As in many other countries, there are numerous ways a company can be organized and registered in China: Limited Liability Companies, Companies Limited by Shares, Holding Companies, Joint Ventures, Wholly Foreign-Owned Enterprises (WFOEs), Representative Offices (ROs), State-Owned Enterprises, Private Enterprises, and Individually-Owned Enterprises.
Understanding the various types of organizing principles can help you make informed decisions around with whom you will do business or partner.
Limited Liability Company
In a China Limited Liability Company (abbreviated LLC, and also known as China Limited Company), the shareholders are solely responsible for the debts of the company with their capital contribution.
Company Limited by Shares
A company that’s limited by shares means that the shareholder liability to the creditors of the company is limited to the original amount of capital invested (also known as the nominal value of the shares. Shareholders’ personal assets are protected in the case of the company’s insolvency. They may be public or private. A company limited by shares must have a board of directors made up of between five to 19 members (Article 108, Company Law).
Another type of company limited by shares is a foreign invested company limited by shares (FICLS). An FICLS (or joint stock company) can be set up by foreign investors and it is the only form of FIEs whose shares can be listed on a China stock exchange (the Shanghai Stock Exchange or the Shenzhen Stock Exchange). FICLS carry specific requirements: a minimum of two and maximum of 200 initial shareholders with at least one being a foreign investor. FICLS are common arrangements when expanding an existing business, converting a Sino-foreign equity joint venture company (EJV), or acquiring a Chinese-based company.
In holding companies in China, foreign investors can purchase assets such as mutual funds, real estate, investments, and business licenses and pay no corporate tax. The tax-free structure makes holding companies an attractive option for organizing a business.
Joint ventures are business arrangements where two or more entities agree to pool resources for a particular aim or task. The venture retains its own identity as a separate entity, distinct from the participants' other business interests. In China, joint ventures involved both a mainland Chinese party and a foreign party. While declining in popularity in favor of WFOE arrangements (described below), joint ventures remain the only option for foreign investors to establish a presence in China in some restricted industry sectors such as media.
There are two primary types of joint ventures.
In cooperative joint ventures, companies have the choice to organize themselves as a limited liability company or as a non-legal person in which the partners are subject to unlimited liability. This means that the partners are entirely liable for losses the joint venture may incur.
In equity joint ventures, two or more companies agree to enter into a separate business venture together. The business structure for an equity joint venture is a separate limited liability company (LLC) that shields each partner and business from liability.
Wholly Foreign-Owned Enterprise (WFOE)
Currently a very popular corporate structure in China, a WFOE is a company established exclusively by foreign parties with no direct involvement of a mainland Chinese investor. WFOEs require a minimum foreign capital investment and comes under strict registration rules with the government. WFOEs offer foreign companies much more flexibility and control over their operations.
Representative Office (RO)
While technically not a legal business entity in China, a RO exists solely to represent a foreign registered company in China. It allows a foreign company to have limited presence in China. ROs are regulated heavily and carry many restrictions, including the inability to employ staff or collect money. ROs, like joint ventures, are declining in popularity in favor of WFOEs.
Much like JVs, ROs are becoming increasingly rare as foreign investors choose to set-up WFOEs for their China operations.
State-Owned Enterprise (SOE)
Until recently, State-Owned Enterprises (also referred to as Government-Owned Corporations, or GOCs) was the dominant – really, exclusive – organizing structure for companies in China. (Essentially, the government owned everything). Reforms that began in the 1980s opened up China’s market and business landscape, ushering in many of the types of businesses that we’ve been discussing here. SOEs still do exist, though, and operate specifically in specific key sectors considered to be of strategic importance by the government, such as aerospace, telecommunications and electric power.
Of all the types of company arrangements in China in operation today, Private Enterprises represent the single most important type of business that has catapulted China from a state-controlled behemoth riddled with inefficiencies and waste to a vibrant, modern, high-growth economy. Private Enterprises, sometimes referred to as Non-State Owned Enterprises or Civilian Owned Enterprises, are companies registered by individuals, groups of individuals or other companies without any government ownership.
The simplest of all company registration types, the Individually-Owned company typically is used for very small companies. A Chinese national is the only person who can own an Individually-Owned business. Sometimes referred to as a Small Private Company or a Sole Trader, it’s a common registration form for Chinese individuals who are operating a simple business such as a shop or a restaurant.
Chinese Company Registration Types Decoded
A Chinese company’s business license is the primary source document where you can validate the type of company (类型 in Chinese).
Questions? We can help. At Nuna Network we offer a variety of valuable guides, tips, and other practical information to help you navigate the sometimes complex landscape with Chinese businesses. We remain the partner of choice for small- and medium-sized businesses seeking guidance in researching, developing, and launching relationships with companies in China. We are your go-to resource for valuable information in navigating the sometimes complex landscape of business operations in China.
In addition, Nuna Network offers a range of validation, verification, and due diligence products and services that can help you determine the authenticity of a range of many other documents that are a part of establishing a business relationship with a Chinese company.
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