How to Structure Your Business in China

Many people are aware that having the right local partner in China can determine whether a business succeeds or fails here. Often, however, people do not realize that structuring a potential business in China wisely is equally important. Starting your business with a solid understanding of your options and a clear strategy is essential.

The best structure for your business depends upon a variety of factors. Our team has helped hundreds of clients successfully enter the Chinese market with a structure that has been carefully tailored to their specific needs and circumstances.

A few of the questions that we can answer when we assist you with crafting the best structure for your business are:
• What if I do not plan to make any investment now, but I still need to conduct business in China?
• I know that there is a market for our products and I am ready to move forward. What are the next steps?
• What I would like to do in China is subject to restrictions on percentage of foreign equity. What options do I have?
• I want to start a Wholly-owned Foreign Enterprise. Should I invest from the US or would it be better to establish an Special Purpose Vehicle in HK first and then use this SPV as the parent company?

A brief introduction to the various business structures available to foreign investors follows below.

Representative Office
Generally speaking, a representative office is for liaison and communication purposes only without the function of providing services and collecting payments. Apart from representative offices of foreign financial institutions or not-for-profit entities, the establishment of a representative office is not a difficult and time-consuming process. Representative offices will be restricted from hiring local employees directly. Since a representative office will be regarded as a cost center in China, it will be taxed based on the amount of the total company expense in China.

Setting up a representative office can be a good first step before setting up any substantial business entity.  However, the limitations to which representative offices are subject make it inappropriate to set up a representative office as an alternative to a different structure.  Please consult us for assistance in determining whether this is the right structure for your purposes.

Wholly Foreign Owned Enterprise (WFOE)

If the PRC government does not pose any restrictions on the particular industry in which you will be engaging and if you are confident at your own organic growth in your field, then a WFOE would be an ideal choice because you can own 100% of this local entity. Please note, however, that the PRC government publishes industry guidelines on foreign investment from time to time. Accordingly, it would be prudent to seek professional advice concerning whether the specific business activity you are interested in falls under any prohibited, restricted or encouraged classification under the current guidelines In addition, you will need  advice regarding what is the most cost-effective plan relating to your total investment, registered capital, injection schedule, and shareholder loan.

Sino-foreign Joint Venture (JV)

A JV may be a good solution in any of the following cases:
(1) There are restrictions on the maximum equity percentage that can be held by a foreign party;
(2) Difficulties in establishing any WFOEs in certain industries;
(3) Regulatory hurdles in doing mergers or acquisitions with an existing PRC entity;
(4) Assistance from local partners is needed for market expansion or growth.

You can decide whether to form an equity JV or a contractual JV depending on different circumstances.

We can assist you with drafting a shareholder agreement, articles of association, and various resolutions. Not only are we experts on the relevant laws and regulations, but also we have extensive experience providing practical recommendations on how to deal with  Chinese joint venture partners, the government, and other stakeholders, as well as assisting in developing strategies for tackling various problems and issues that may arise in a joint venture.

Other Structure

In some cases, the above straightforward options do not adequately address particular concerns. For instance, you do not want to establish a JV, notwithstanding the fact that, for various reasons, there are clear restrictions on foreign ownership percentage of a business in your industry.

Please discuss your objectives with our team members because we have extensive experience successfully tailoring structures to accommodate clients'  special circumstances or concerns.  We are creative thinkers and we offer a variety of solutions ranging from setting up trusts to establishing indirect control over an entity via a series of contractual arrangements.

For more information or to set up an appointment, please contact Hao Wang at wh@rayyinlawyer.com, Yi Zhou at zy@rayyinlawyer.com,