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Legal Entities (Company Structures) in China |
- Chinese company law (mainland) distinguishes between 3 general kinds of legal entities (company structures):
- Limited Liability Company (comparable with a German GmbH or an American LLC) [applies to Chinese]
- Company Limited by Shares (comparable with a German AG or an American Corporation/Inc.) [applies to Chinese]
- Foreign Invested Enterprise (FIE) [applies to foreigers]
Latter category also comprises of WOFEs, JVs and M&A, as discussed in class.
As for Limited Liability Companies, no more than 50 shareholders are admissible and the foundation capital must amount to at least RMB 100,000, and depending on industry sector, business plan, etc., authorities are entitled to raise this limit.
Any LLC in China must have the prefix "有限公司" in their company name (--> "有限公司" = "GmbH" or "LLC").
Caution: Do not confuse a Chinese LLC with a Chinese Corporation, which also contains "有限公司" in the company name. However, there are two more additional characters that indicate a Chinese Corporation: "股份有限公司" = "AG" or "Inc.".- (Check this out next time when you exchange business cards in China.)
- A Chinese CLS requires at least 2 shareholders and a minimum equity of RMB 5 million.
As a company owner in China you must do accounting and submit your reports to the tax authorities on a monthly basis (not annually as in Hongkong and most Western economies).
You must also employ a certified accountant on a full-time basis.
However, many small business cannot affort a high-paid accountant and outsource the bookkeeping to an external accountant/tax advisor.- (Fees for accountants/tax advisors are low in China, unless they speak English or other foreign languages and are familiar with GAAP or other foreign accounting principles. Then fees can multiply and even tenfold. (the same applies to hiring lawyers.))
As the name suggests, there should be no personal liability involved (owners should only be liable with their invested capital).
However, in practice this does not seem to be the case.
- There are frequent news in the Chinese media about company owners being forced to use their personal assets to bail out the company or pay off the company's debtors.
- In fact many Western countries such as Germany also have a law that makes CEOs and general managers personally liable for the way how they manage the business within a certain scope. It seems that Chines judges are less reluctant to make use of such laws (unlike in Western economies - see 2008/09 world financial crisis)
(If you know a reason for this, please let me know).
As for the registration of a Limited Liability Company ("... Co. Ltd." or "... LLC" or "... GmbH" ("...有限公司")) the following structures offer a variety of advantages:
1st step: Registration of an offschore firm in Hongkong (functions as holding)
2nd step: Registration of a foreign branch in mainland China (Chinese branch is owned by the Hongkong holding)
This scheme works well both for mainland Chinese and foreigners (including Hongkong and Macao).
(China Mobile, China's biggest enterprise in terms of customers, also applies this scheme)
Talking to many Chinese business men these days there seems to be a trend of moving the holding from Hongkong to other locations (Caiman Islands, Bahamas, etc.), since one fears that Beijing will soon pass laws to close the Hongkong loophole, da man befürchtet (less relevant to foreigners).
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