Navigating Business Structures in China: A Comprehensive Guide for Foreign Investors

Incorporating a business in China requires an understanding of various business structures. This comprehensive guide explores the primary business structures in China. Foreign investors must carefully navigate these structures as each entails unique legal characteristics.

This guide provides essential insights to Sole Praetorships, Limited Liability Companies, Wholly Foreign Owned Enterprises, and Joint Venture companies among others, guiding the investor to make informed decisions to invest in the Chinese market.

Understanding Business Structures

1. Sole Proprietor

It is a form of business structure that is more friendly for startups having a sole founder and for businesses that operate at a relatively small scale in any market.

The sole proprietor is a sole shareholder and needs to be a Chinese national. This entity needs to be owned by a Chinese national and managed solely by that individual who would bear complete responsibility for the profit and the loss which may accrue.  China's 2011 Sole Proprietorship Enterprise Regulations govern the business structure of a Sole Proprietor.

2. Limited Liability Company (LLC)

The LLC is a widely known business structure incorporated by foreign investors intending to incorporate a company in China. An LLC can be incorporated by no more than fifty (50) shareholders. The ownership in an LLC is determined by the amount of the subscribed capital that each subscriber contributes to this form of business structure. The new Company Law of the People's Republic of China mandates that shareholders contribute their subscribed capital within five (5) years of the company's establishment and prescribes other obligations that an LLC needs to perform to ensure timely and transparent capital contributions.

LLC is taxed based on the Corporate Income Tax (CIT), the standard CIT in China is 25% and a withholding tax of 10% is payable on dividends, interests, and royalties to be paid to non-resident enterprises. Further, profits of an LLC are taxed at the individual level of a shareholder which ranges from 3 % to 45% in a fiscal year.

3. Partnership

This form of a business structure is owned and operated by several individuals or companies and is governed by the 2006 Partnership Enterprise Law. In this business structure, the ownership share and the associated rights and responsibilities are determined by the amount of each partner's stake. Further, a Partner is only allowed to transfer its stake once it has sought confirmation by all the other partners to do so.

4. China Wholly Foreign Owned Enterprise (WFOE)

WFOE is governed by China's Foreign Investment Law of 2019. This form of business structure is a type of limited liability company that is wholly owned by a foreign investor. The foreign investor is granted 100% ownership and management control to the foreign investor, which enables the investor greater freedom in business activities, further allowing the investors to retain all profits and enabling direct access to the Chinese market.

The type of WFOE can be either Consulting WFOE, Trading WFOE, or manufacturing WFOE, depending on the nature of the business activity.

5. One-Person Limited Liability Company.

This form of a business structure refers to a limited liability company having a single natural person as a shareholder.

The Company's law to the People's Republic of China specifies that a sole shareholder would be required to make a financial report by the end of every fiscal year and the report needs to be audited by an accounting firm.  

Further, the shareholder can directly proceed to convene the shareholders' meetings by signing a written form without being bound by company law to the PRC. Further, as there is only one shareholder in this company, the company law mandates that the sole shareholder would be jointly liable for all the debts of the company.

6. Public Companies

This form of a business structure refers to business entities whose shares are publicly traded on a stock exchange, for instance, the Shanghai or Shenzen stock exchanges, these companies are subject to stringent regulatory requirements and reporting obligations as compared to the private companies. Further, these companies can raise capital through public stock offerings and offer limited liability protection for shareholders.

These companies are subject to Corporate Income Tax (CIT) and Withholding Tax, as well as other local taxes made applicable every fiscal year.

7. Joint Stock Company:

This form of a business structure is owned by shareholders, where the ownership is divided into shares, and each shareholder has a limited liability only to the value of their shares. Under PRC Company's Law, a joint stock company is recognized as a separate legal entity from the shareholders.

Further, the new China company law allows a single individual to establish this company which has reduced the previous barriers to having at least two founding members, now a single individual can establish this form of a company, thus making it more accessible for smaller businesses.

8. Joint Venture Company (JVC)

This form of a business structure is an LLC formed by a foreign investor and a Chinese shareholder who enter into a business relationship via a joint venture agreement for some specific purpose, which may concern completing a new project or entering into a new market in this form of a business structure the Chinese shareholder exercises a certain percentage of equity interest in the company.  The JVC conducts business as per the terms and conditions of the agreement and as per the governing agreement.

Why Choose a Limited Liability Company (LLC)?

LLCs are a widely used business structure in China, convenient for both domestic and foreign investors owing to their key characteristics of separate legal entities, distinct from their shareholders owing to the limited liability protection of the shareholders and flexible approach to making decisions owing to the autonomy in the decision-making process as compared to the state-owned companies. Further, the company law, which came into force on July 1, 2024, has ensured that the rights of the shareholders are protected and there is transparency in decision-making owing to the greater regulatory compliance both in terms of legal and regulatory aspects, which ensures a source of protection to the foreign investor intending to invest in China.

Navigating the Registration Process of a Limited Liability Company (LLC)

Registering a company in China involves the following steps as prescribed under the Company law of the People's Republic of China (PRC).

1. Reserving the Company's Name: The foreign investor intending to incorporate a company in China needs to reserve the name of the company from the Administration of Industry and Commerce (AIC).
2. Securing an approval certificate: The foreign investor needs to apply for an operating license and approval certificate from the State Administration of Industry and Commerce ( SAIC) and the Ministry of Commerce (MOFOCM).
3. Applying for business license: Once the approval certificate is granted, a foreign investor needs to apply for some additional licenses depending on the nature of the business.
4. Register with the Public Security Bureau (PSB): The registration with the PSB will make the company eligible to obtain the company chops- also known as a signature of a company which helps it to validate any contract in China.
5. Open a bank account: The company needs to apply for a corporate bank account once it has secured all the required licenses mentioned above to operate its business.
6. Register with a Tax Bureau: All businesses must comply with the requisite tax regulations, the tax on a business could be in the form of a Corporate Income Tax (CIT);Value Added Tax (VAT); transaction tax and custom duties.
7. Preparation of Memorandum of Association and Articles of Association: The foreign investor needs to finalize the charter documents, primarily the MOA, which concerns the principal business activity of the company and the AOA, which concerns the rules and regulations through which the employees of the company will be bound.

Post Registration Compliance Requirements

Once the LLC is incorporated, as per the Company Law of the People's Republic of China, the company is required to undertake the following: -

1. Official Address: Once incorporated the company needs to finalize its registered office, the registered office of the company should be preferably where the company intends to undertake its business.
2. Contribution of a subscribed capital: Once the LLC is incorporated the shareholders must contribute their subscribed capital within five (5) years of its incorporation.
3. LLCs with more than 300 employees must have at least one employee representative on the board of directors.
4. Statutory annual audit: A quintessential step after an LLC is incorporated is the preparation of an annual audit report by a certified public accountant form. This audit is carried out under Chinese GAPP ( General Accepted Accounting Principles)
5. Annual tax filing: Once the LLP has prepared its audit report it needs to comply with the annual Corporate Income Tax (CIT) filing which is levied on profits incurred by an LLC and is further dependent on the nature and size of the company.
6. Annual reporting procedures: This step includes various filings that need to be made with local government departments: the Ministry of Commerce (MOFCOM), the State Administration for Market Regulation of Industry and Commerce (SAMR), the State of Foreign Exchange (SAFE) and the Finance Authority and Customs Authority (for trading companies). The relevant information and documents that need to be filed include information concerning the investments of the company, the details of the Ultimate Beneficial Owner (UBO), the business scope, and other information that the concerned department may require to be produced.

Benefits of Registering a Limited Liability Company in China

China has a friendly business environment and is an attractive destination for foreign investment both due to the scale of its population and the availability of skilled labor. Further, the investment procedure is streamlined and less time-consuming, and its dominance in several industries, including the manufacturing sector, technology, and finance, makes it an attractive destination for a foreign investor to incorporate its business.

Further, the People's Republic of China (PRC), through its newly formulated company law, which came into force on July 1, 2024, introduced several beneficial changes for companies operating in China, ranging from strengthened shareholder obligations to enhanced corporate governance and greater transparency to the overall legal and regulatory framework. These amendments have made China an attractive destination for foreign investment where any foreign investor intending to invest in China is assured of its rights and obligations, either by being a shareholder or a director of the company.

Frequently Asked Questions (FAQs)

This paragraph clarifies a few questions that every foreign investor may have while they incorporate a Limited Liability Company (LLC) in China.

How much does it cost to register a company in China?

The cost to register a company in China varies on the type of company, the location where the company needs to be set up, and the nature of business activity.

Can a foreign national be a director of an LLC?

Foreign nationals can be directors of an LLC in China under China's Company Law.

How many members are required to start an LLC?

There must be at least two and no more than 200 promoters, with more than half of them need to have their domicile within the territory of China.

Conclusion

Navigating business structures in China is crucial for foreign investors, where each company/ business structure offers unique characteristics. China's streamlined regulation and strong compliance framework contribute to its business-friendly stance. The country's robust economy, skilled labor force, and recent legal reforms make it an attractive destination for foreign investment. By comprehensively grasping these factors, investors can strategically position themselves to thrive in China's dynamic and evolving landscape.

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