Should you choose to be a WFOE or a JV company? Making the right choice for your business will be a cornerstone of your success. Making the wrong choice can have negative impacts on your business in China. Choosing the right type of company structure is the first choice that you need to make.
Two of the most popular company structure options are officially known as Wholly Foreign- Owned Enterprises (WFOE) or Joint Ventures (JV). If you’re looking for a straightforward and simple approach to setting up a foreign company in China, it’s highly recommended that you choose the WFOE option.
A WFOE company in China is known as a limited liability company that is held in shares and is established solely by using the capital of foreign investors. There are a number of laws and regulations that you need to adhere to when establishing a WFOE in China. Opportunities for investment can be restricted if the business operates in certain industries, especially those that are prohibited entirely.
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However, here are three of the most common WFOE types that you can establish in China:
WFOE (Consulting) – This type is for a services or consultant business that is licensed to operate as such.
WFOE (Trading) – This option gives you the chance to get a license for wholesaling, conducting trade, franchising, and retailing throughout China. An additional registration via customs is required for this type of business so they can export and/or import goods in and from China. They can also offer other services such as consultancy.
WFOE (Manufacturing) – This gives businesses in China a license to sell and manufacture products. The registration processes are quite different when compared to the other two options as this one is more burdensome because it requires industrial lease space and environmental impact assessments that must be performed before a business license application is even submitted.
Although many foreign-owned businesses opt for a WFOE in China, it’s also possible to become a Joint Venture (JV). The JV type is a limited liability company in China that is very similar to WFOE as it needs to follow the same rules and regulations.
Foreign investors choose a WFOE because they can keep tighter controls over their business operations in China, and it is possible to be listed as a JV with some Chinese partners. This is ideally suited to those who have partners in China who own a number of resources such as a sales network, technology, a production location for operations, capital, or lots of knowledge about the said industry.
What are the Advantages of a WFOE Instead of a JV?
Here are some things you need to know about the advantages of using a WFOE instead of a JV business setup in China:
100% control over the company and the equity for its foreign investors.
Because you don’t have a partner who has a domestic enterprise locally when becoming a WFOE, the investors can have total control over HR matters in regards to control and independence and the managing of operations and formulating your own business growth strategies.
You can directly conduct business activities when you are a WFOE. You can control your trading, servicing, general business activities, and even your own manufacturing as long as it’s legal, or not restricted or prohibited by the Chinese government, and that the business adheres to the already approved and agreed upon business scope.
Official invoices for VAT, called fapiao, are allowed to be issued in RMB, and sales revenues can also be collected in RMB when choosing WFOE.
WFOEs are allowed to employ both local Chinese employees and foreigners with no limitations on how many foreigners are allowed in the company.
Any profits that have been made by the company in China after a certain limited reserve threshold has been met, can be paid to the WFOE in terms of a dividend back to the investors of the company.
As a favored investment vehicle, nothing can match a WFOE because it gives the foreign parent company total control and full autonomy over their business in China while still allowing the company to work in tandem with other local partners while remaining in control.
Establishing a Joint Venture (JV) in China
Joint Ventures, on the other hand, are definitely a viable relationship that offers a great deal of give and take from all quarters, although it might not have the same total control as a WFOE. The main issue for a JV is sourcing a local Chinese partner that has the ideal amount of expertise and resources that suits your business model. This is the toughest task you will face when establishing a Joint Venture.
Not rushing into a partnership is good advice. Too many companies hastily rush into partnerships, and when this is combined with other factors such as costing and the complex documentation requirements, establishing a Joint Venture is more difficult than forming a WFOE. If you do not know your potential partner’s motives and objectives from the beginning, it can backfire and cause common disputes like the below possibilities:
- Breakdown in communications or miscommunications by the partners that can result in bad business decisions that can be costly.
- Mismanaging resources and operations.
- The value each partner brings to the JV is unbalanced.
- Cultural differences between the parties that are difficult to overcome and result in disputes.
- All manner of conflict of interest issues between the partners.
- Potential technological and intellectual property use disputes.
- Issues leading to disputes regarding the division of JV profits.
Choosing a WFOE or JV in China?
We highly recommend that our clients opt to establish a WFOE instead of a JV every time. A Wholly Foreign-Owned Enterprises option is a very safe a popular choice that foreign investors in China regularly choose over a JV. You get 100% ownership of your company with no entry barriers and that is a massive advantage over Joint Ventures.
International companies are specifically advised to establish WFOEs in China so they can conveniently execute their trade activities and manufacturing operations and manage their investment without any restrictions in China.
You won’t need to register any capital as well when establishing a WFOE, so foreign businesses can set it up without any upfront capital. Complete ownership of intellectual property, all the decision-making, and getting 100% of all the profits is why a WFOE trumps a JV Join Venture in China.