Before starting a business in China, you should understand the different types of business structures you can establish as a foreigner, and how they differ. Note that some areas of certain industries are totally closed to foreign investment. The five options available are:

1. Wholly Foreign Owned Enterprise (WFOE)
2. Representative Office (RO)
3. Joint Venture (JV)
4. Partnership Enterprise (PE)
5. Hong Kong company

Wholly Foreign Owned Enterprise (WFOE)

The big advantage of Wholly Foreign Owned Enterprises is that it gives the foreign investor sole control of their business activities in China. In certain industries, it is not possible for foreign investors to set up a WFOE at all and the owners must set up a Joint Venture (JV; see below) instead; in others it requires government pre-approval (JVs do not require such approval). However, in some industries WFOEs are becoming increasingly common. A WFOE is a limited liability company, requiring registered capital, with liability limited to its equity. It can generate income, pays tax in China and its profit can be repatriated to the investor’s home country.

Both WFOEs and JVs may be able to receive preferential policies such as tariff exemptions for imported equipment, favorable land use policies, or tax incentives. These policies differ from province to province. Before you start up the company, regardless of whether it is a WFOE or a JV, consult your local government to check out what kind of policies you can enjoy.

Representative Office (RO)

Representative Offices are technically not allowed to generate revenue or enter into contracts with businesses in China. 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. 

Joint Venture (JV)

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). Both parties contribute investment, then share the revenues, expenses and control of the enterprise. In restricted industries a JV may be your best option, though these structures are among the trickiest to run. This is because decisions can only be enacted by a company if both sides – Chinese and foreign – agree, which can lead to frustration and stalling if parties cannot agree to terms. Additionally, in certain industries (outlined in the Catalogue for the Guidance of Foreign Investment Industries - Chinese only) the law demands that the Chinese half of the business have the controlling share, which can lower your bargaining power in the event of disagreements. And, of course, the money you can take back will always be less than you would get with a WFOE.

Partnership Enterprise (PE)

Similar to a JV, 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). This option was introduced in 2007, although clarification about how it applied to foreigners did not arrive until 2010. It requires no approval from the Ministry of Commerce and no capital verification report, which means there is no minimum capital requirement. Additionally, such enterprises don’t have to pay business income tax, which substantially reduces the cost of investment.

It’s not all good news, however: PEs are excluded from around 100 industries in the Catalogue for the Guidance of Foreign Investment Industries (found here - Chinese only) , which reserves them only for WFOEs and JVs. Additionally, foreign investors of WFOEs and JVs are subject only to limited responsiblity of the company in accordance with their invested capital, while the investors of PEs are subject to unlimited responsibility of the company, which constitutes a huge investment risk.  

Useful Chinese words and phrases 

Source：onestop