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Joint Venture
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Equity
Joint Ventures
There are two types of joint ventures - Equity Joint
Ventures and Cooperative Joint Ventures. The Equity
Joint Venture is the older type, which provides less
flexibility. An Equity Joint Venture always takes the
form of a limited liability company. This shields the
personal property and wealth of the responsible individuals
from corporate loss.
The allocation of profits is the most significant difference
between Equity Joint Ventures and Cooperative Joint
Ventures. In Equity Joint Ventures, the ratio of capital
contributions made by the partners determines how profits
are allocated. If one party contributes 40% of the total
capital investment, they will receive 40% of total profits.
Most manufacturers prefer Equity Joint Ventures as an
investment vehicle. Before making a decision which type
of joint venture to choose, the purpose of the investment
must be clear.
Cooperative
joint ventures
Cooperative Joint Ventures offer more flexibility.
They can be organized either as a limited liability
company or as a non-legal person, in which the partners
are subject to unlimited liability and thus entirely
liable for any losses the joint venture may incur. Most
Cooperative Joint Ventures are established as limited
liability companies.
Unlike Equity Joint Ventures, Cooperative Joint Ventures
allow for profits to be allocated according to the partners'
discretion. One party may recover its investment through
an accelerated repayment structure, and the other party
may become the owner of the joint venture's assets after
termination of the joint venture.
The legal system in China and the business climate are
changing in favor of Wholly Foreign Owned Enterprises
and the restructuring of joint ventures. Joint ventures
can be restructured into WFOEs. In another scenario,
the Chinese side may be transformed into a "silent
partner" without significant decision-making powers
by reducing their equity stake. To change the equity
structure, the foreign investor may contribute additional
capital without the Chinese partner increasing their
original investment.
The Ministry of Foreign Trade and Economic Cooperation
must approve any type of equity change. There are a
few sensitive industries, in which 100% foreign ownership
is not permitted and the Chinese partner must be the
majority holder.
Application Procedures for registering a JV
Documents required for registering a JV
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