China Partnership Enterprise Formation
The Foreign Invested Partnership Enterprise (PE) is a unlimited liability business entity without minimum requirements on registered capital.
The term partnership enterprise refers to general partnerships and limited partnerships which may be established within China by individuals, legal persons and other organizations. A state-funded company, state-owned company, listed company, public welfare-oriented public institution or social organization may not become a general partner of a limited partnership. Following are different types of FIPE:
1. General partnership Enterprise (GPE)
General partnership enterprise may be formed by general partners who bear unlimited joint and several liability for the debts of the partnership. The general partners share unlimited liabilities for the debt of the partnership.
2. Limited partnership enterprise (LPE)
A limited partnership enterprise is formed by a combination of general partners and limited partners where the limited partners bear the liabilities for the partnership’s debts to the extent of their capital contributions.
3. Special General Partnership enterprise (SGP)
A special general partnership enterprise resembles a general partnership except that it must be a professional service institution offering services requiring professional knowledge and special skills. The structure shields co-partners from liabilities due to the willful misconduct or gross negligence of one partner or a group of partners. It is very similar to limited liability partnership in Europe and America.
The Advantages of Establishing a PE
- No corporate income tax for partnership enterprise;
- No requirements on minium registered capital;
- Less procedures comparing with Wholly Foreign Owned Enterprise or Joint Venture
- Capability of converting RMB profits to US dollars for remittance to its parent company outside of China;
- Foreign Enterprise or Individual is allowed to establish a Partnership Enterprise with Chinese individual (While Chinese individual is not allowed to have Joint Venture with foreign investor)
- The profit distribution of a PE could follow an informal negotiated agreement or abide by scheme adopted in the partnership agreement (While for LLC, profit distributions is according the the percentage of investment of shareholders)
The Disadvantages of Establishing a PE
- Unlimited liability; A partnership must pay all its debts with property contributed to the partnership by the partners. If the partnership is a general partnership then the partners bear joint and several liability;
- Limited business names options: Can’t have business name with “Company” in it, eg, can’t have name lie XYZ Co., or XYZ Co., Ltd. and could only choose names like: XYZ Firm (PE), XYZ center (PE)
- Property rights of partnership enterprise is difficult to be transferring to a third party as according to the Partnership Enterprise Law: the property rights of partnership transfer MUST be agreed by all partners in a PE;
- China has not adopted Natural Person’s Bankruptcy system, credibility of the partners would be hard to maintain if PE involves into a hard situation
- As for trading business of a PE, since PE is not a general tax payer, PE can’t get VAT status, and can’t apply for VAT rebate accordingly