A. BUSINESS MODELS:-
China’s Company Law recognizes two types of companies.
- Limited Liability Company- requires a minimum capital of RMB 30,000 with less than 50 shareholders. The capital can be in the form of cash, industrial property or land use rights. A shareholder of a limited liability company is liable for the Company to the extent of the capital contribution it subscribes.
- Company Limited by Shares- set up by promotion or share offer with a minimum share capital of RMB 5 million. For incorporation, no less than two promoters are required. Establishment by share offer is subject to the approval of China’s securities regulator.A shareholder of a company limited by shares shall be liable for the company to the extent of the shares it subscribes.
Foreign Investors generally establish a business presence in China in one of five ways:-
- Wholly Foreign-Owned Enterprise (WFOE)– limited liability company wholly owned by the foreign investor. A WFOE requires registered capital and its liability is limited to its equity, it can generate income, pays tax in China and its profit can be repatriate back to the investor’s home country. Any limited liability enterprise in China which is 100% owned by a foreign company, individual(s) or companies can be called as WFOE. The registered capitalof a Wholly Foreign Owned Enterprise (WFOE) should be subscribed and contributed solely by the foreign investor(s). Foreign investors are not permitted to directly submit the application documents of incorporate a WFOE to the relevant authority in China. They must retain a People’s Republic of China (PRC) entity that is authorized or permitted by relevant authorities to act as a sponsor. The sponsor will submit all the documents to the examination and approval authorities on behalf of the foreign investor.
The registration procedure of a wholly foreign owned enterprise can be summarized as under:-
- Name pre-registration with the local Administrative Bureau for Industry and Commerce (AIC). After an application has been filed, name pre-registration is completed within five working days.
- Project Proposal should be submitted to a local approval authority where investor intends to establish a WFOE.
- Within 30 days, the foreign investor will need to register and apply for a business licence for the WFOE from the local AIC.
- After a business licence has been issued, the company must be registered with some other government authorities and obtain permits, depending on the nature and purpose of the operations. A WFOE must renew the licence with the AIC after it has paid-up the foreign capital to the foreign currency account. After paying-up the capital, the AIC will issue a business licence and the company can begin to operate within the business licence.
Documents required for establishing a WFOE include-
- Copies of passports or ID cards of all investors in the company;
- If the investor is an overseas company, it must provide a company registration certificate;
- Two two-inch photos of the executive director;
- Telephone number and fax number of the company to be established;
- A profile of the new company including details about the field of activities, estimated turnover, estimated number of staff and estimated profit of the new company;
- Original copies of the overseas bank references of each investor. This is to prove credit worthiness of the investors; and
- Original copy of the tenancy agreement of the registered office.
- Representative Office-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. The process to set up a representative office in China involves the following steps:-
- Submitting an application for the registration certificate with the local AIC;
- Obtaining a Public Security Bureau Certificate;
- Applying for Enterprise Code Certificates with the Technical Supervision Bureau;
- Registration with Local Taxation Bureau;
- Registration with the State Administration of Foreign Exchange;
- Obtaining Customs Registration certificate;
- Registration with the Statistical Bureau; and
- Opening up a Bank Account.
For registration, documents that may be required include- Certificate of Incorporation; Copy of Articles of Association of the parent company; Letter of authorization from the parents company’s director; Letter of authorized signatory; Appointment letter of China Chief Representative and other Representatives; Passport copies of the China Chief Representative and other Representatives; Brief explanations of the services and business conducted by the parent company and the scope of services of the representative office in China; Bank Reference and Copies of passports, photos and Curriculum Vitae for the China Chief Representative and other Representatives.
- Joint Venture-Joint Ventures are limited liability companies formed between a Chinese company and a foreign investor (the latter of which can be a company or an individual). Equity joint ventures (EJV)and Cooperative Joint Ventures (CJV) can be established in China.
EJV is a limited liability company and is required to be registered as a legal person. The main feature is that the joint venture parties take responsibility for losses and profits according to the ratio of their equity stake. The minimum level of foreign participation in an EJV is 25% of the registered capital in general. Where an EJV with less than 25% of capital contributed by foreign investor(s) is approved and registered, the business licence will indicate “foreign investment ratio below 25%” after the entry in the “Enterprise type” column. Equity cannot be transferred or withdrawn under any scenario without the approval of the government.
A CJV has the option to register as a legal person with limited liability. The parties in a CJV have the flexibility of choosing whether to operate the enterprise as a limited liability company or to operate it as an unincorporated entity under which partners bear unlimited liability. The profits of a CJV are allowed to be shared by participants as specified in the joint venture contract, and not necessarily in proportion to their capital contribution. Investment contributions from each party are not limited to financial capital but may also include non-financial assets such as intellectual property rights, buildings, materials or machinery. Transfer or withdrawal of investments is not subject to the approval of the government. Foreign investors can deploy their registered capital as they see fit.
Joint ventures in China can start their registration following an examination and approval from the Chinese Ministry of Foreign Economic Relations and Trade. The documents needed for establishing a Chinese joint venture are:-
- Application Form;
- Feasibility Study Report;
- Joint Venture Agreement between the two companies; and
- List of Candidates for Managerial Positions and other Company documents, if requested.
- Partnership Enterprise (PE)-Partnership Enterprises allow two or more foreign enterprises or individuals to do business together in China (they also allow for Chinese enterprises, as with a JV). It requires no approval from the Ministry of Commerce and no capital verification report, which means there is no minimum capital requirement. A Foreign Invested Partnership Enterprise (FIPE) can be of the following main forms-
a) General Partnership Enterprise (GPE)-Formed by general partners who bear unlimited joint and several liability for the debts of the partnership. The general partners share unlimited liabilities for the debt of the partnership;
b) Limited Partnership Enterprise (LPE)– formed by a combination of general partners and limited partners where the limited partners bear the liabilities for the partnership’s debts to the extent of their capital contributions. Limited partners generally do not participate in the daily management of the entity’s affairs and are liable for debts of the partnership only to the extent of their capital contributions to the partnership; or
c) Special General Partnership Enterprise (SGPE)– which resembles a general partnership except that it must be a professional service institution offering services requiring professional knowledge and special skills.
FIPE establishment/registration involves the following steps:-
- Name Registration with local State Administration for Industry and Commerce (SAIC);
- Pre-approval from local government authorities concerned if business scope entails such pre-approval;
- Application for temporary Business License with local SAIC;
- Obtaining a Public Security Bureau Certificate;
- Obtaining Organization Code License by local Bureau of Quality and Technical Supervision (BQTS);
- Obtaining Tax Certificate from the Tax Bureau;
- Registration and Approval with State Administration of Foreign Exchange (SAFE);
- Opening Foreign Currency and RMB bank account;
- Injecting Capital from investor’s overseas bank account;
- Obtaining Capital Verification Report by Certified Public Accountant (CPA);
- Hong Kong Company-Hong Kong is one of the fastest and easiest places to set up a business. Although a Hong Kong company is not a legal entity in mainland China, many foreign investors choose to register their business in Hong Kong to invest in China.
B. ENTREPRENEURSHIP IN CHINA–
Up until 1978, China’s industry was dominated by State Owned Enterprises (SOE’s), with ‘entrepreneurship’ only existing as very small-scale activities in retail and services such as street vendors. Throughout the 1980’s, agriculture was de-collectivized, opening up the market to foreign investors and entrepreneurship was actively encouraged through the creation of patent laws and more investor-friendly environments. The most common for foreign businesses are joint ventures, representative offices, and wholly foreign owned enterprises. Each, of course, has its pros and cons.