Today, China is one of the largest economies in the globe. In less than five decades, the country has undergone transformations that can only be described as magical.
In addition to having a large population, China has a highly developed infrastructure and favorable business environment. So, if you want your business to grow rapidly in Asia and even globally, you should consider registering and operating it in China.
The three common legal business formations in China are wholly foreign owned enterprises (WFOE), joint ventures, and branch offices. But if you want to grow your business rapidly, one of the best business formations is a joint venture.
Although a joint venture requires your Chinese partner to have controlling shareholding in the business, you will be able to exploit his understanding of the local market, and networks for rapid growth.
In this post, we will look at the different types of joint ventures that you can form in China.
Equity Joint Venture (EJV)
This is an enterprise that is created using capital pooled from two investors (companies), a foreign business, and a domestic one. With this type of joint venture, the profits are distributed depending on the shares that each contributing company has.
The joint venture uses a two-tier management structure that comprises of a management team and board of directors.
But it is the management team that is responsible for the daily running of the company. Other important things you need to know about equity joint ventures include:
- The foreign business has to contribute a minimum of 25% of the joint venture capital. But the contribution cannot go beyond 49% because the Chinese partner must be a majority shareholder.
- The shareholding cannot be transferred without getting approval from the Chinese administration. Furthermore, investors are restricted from withdrawing the joint venture’s registered capital.
Cooperative Joint Venture (CJV)
Like an equity joint venture, a cooperative joint venture is established with capital pooled from domestic and foreign entities.
With a CJV, the profit is distributed between investors in a proportion that may deviate from the number of shares held by each investor.
This means that you can enter into an agreement for sharing profits before registering the company.
Although this model is still used by some companies, it was more common in the past when Chinese partners mainly provided land and labor as their contribution.
The running of a cooperative joint venture uses a board of directors as the highest organ of management, and a management team for daily operations.
Here are other important things that you need to know about CJV operations in China.
- There is no limitation on the minimum foreign contribution. However, the rule that the foreign partner must be a minor shareholder, and the Chinese partner a majority shareholder still applies.
- Unlike the equity joint venture, the cooperative joint venture offers greater flexibility on structuring of the enterprise.
- The foreign investor is allowed to withdraw the registered capital or a portion of it during the period of the contract.
If you prefer to use a joint venture in China, it is important to understand that they fall in different categories.
To make the process simpler, and ensure you have the best agreement with your Chinese partner, you should consider working with an expert agency.