Key Considerations when setting up a WFOE in China: How to structure your organization

The WFOE, or Wholly Foreign-Owned Enterprise, in China is a Limited Liability Company (LLC) which is established exclusively by foreign investor’s capital. Since China officially became part of the World Trade Organization, the WFOE has become the preferred entry mode to access the Chinese market. The establishment of a WFOE in China is subject to various laws and regulations. To provide you a better understanding of what a WFOE is and what is required to establish such a company, we dive into a key consideration of setting up a WFOE in China; how to determine the roles within your organization.

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SETTING UP A WFOE IN CHINA: KEY POSITIONS AMONG WFOE PERSONNEL IN CHINA

• Any Wholly Foreign-Owned Enterprise in Mainland China must have a Legal Representative, Managing Director or Board of Directors, General Manager, and a Supervisor. It is required to determine those positions during the WFOE setup phase.

SHAREHOLDER

A minimum of one shareholder is required, and the details of the shareholder are filed with the local Administration for Industry and Commerce (AIC) when establishing the WFOE. The shareholder(s) can be of any nationality except for a Chinese local company. Shareholder meetings can take place anywhere.

MANAGING DIRECTOR/BOARD OF DIRECTORS

A WFOE can be either managed by a board of directors or through a single managing director. The board of directors must be comprised of no fewer than three and no more than thirteen members, and full details regarding these individuals must be filed with the AIC. One director among the board is appointed as the chairman who also serves as the legal representative and has the authority to make agreements on behalf of the WFOE.

It is up to the discretion of the investor to decide the management structure. A WFOE can choose to have just one managing director if the company operates on a small scale and has few shareholders.

The directors can be of any nationality. Corporations cannot be regarded as part of the board of directors, so directors must be natural persons and cannot be legal entities. There is no requirement for board meetings to be held within China.

LEGAL REPRESENTATIVE

Any WFOE must appoint a legal representative of whom the full details must be filed with the local AIC. The legal representative may be of any nationality and does not have to reside in China.

The legal representative bears complete responsibility of the firm’s actions and maintains full authority over the company chops. This means that this person is entitled to engage in any business activity on behalf of the company. However this person is responsible to Chinese governmental authorities in the case of any discrepancies being committed by the company (if a legal representative resides outside China this will mitigate such risk, as authorities will not be able to hold this individual directly accountable).

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GENERAL MANAGER

The day-to-day activities of the WFOE in China are managed by the general manager. This position does not have to be registered with the Administration of Industry and Commerce.

This person can be either a member of the board or an independent individual. It is not required for the appointed individual to have a certain nationality or to be a resident of China. However, generally WFOEs appoint a Chinese national who does not serve on the board and resides in China, as general manager. The general manager has the authority to sign and chop agreements on behalf of the company, but usually requires prior approval from the legal representative.

SUPERVISOR/BOARD OF SUPERVISORS

A supervisor is responsible for supervising the conduct of the board/managing director in order to protect the rights of the shareholder(s). In practice, the supervisor of a WFOE has no direct authority or responsibility, and usually serves a ‘symbolic function’ within the company.

A WFOE in China is required by the Company Law to appoint at least one natural person as the supervisor, and this person can be of any nationality and reside in any place. The supervisor cannot be appointed as the general manager nor legal representative.

CONCLUSION

How to fill the key positions in your WFOE in China varies depending on the size, budget of your organization and several other factors. Every business established in China, whether foreign or domestic, must carefully consider its organizational structure.

MS Advisory has more than a decade of experience in supporting foreign enterprises to enter the Chinese market and set up their business structure. If you have any questions about this subject, please do not hesitate to contact us at info@msadvisory.com.

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