In two recent posts, How To Succeed When Taking Your Company Overseas and Do I Always Need to Form a Company in a Foreign Country?, I discussed some common issues companies need to wrestle with when deciding whether and how to take their company overseas. Among those are the pitfalls of having a foreign entity when you do not really need one and today’s topic: navigating the available types of foreign entities.
Even if you are not new to the world of international business, a quick search of the types of business entities in any country turns up results that feel familiar and also appropriately foreign. U.S. companies are commonly corporations or LLCs and carry designations like Inc, Corp, and LLC. Although partnerships are less common than 30 years ago, both general and limited partnerships are still also available, though seldom used. Looking abroad, both common law and civil law countries mirror these types of entities with their own domestic nuances.
In China, FIEs (foreign-invested entities) are commonly broken down into WFOEs/WOFEs (wholly foreign owned enterprises) and JVs (joint ventures). Which of these are utilized depends on whether there is any Chinese ownership involved in the venture. WFOEs are more commonly used than JVs because foreign companies generally want to retain control of their Chinese business ventures. China JVs can go horribly wrong even where the China JV partner only owns a small minority interest (see China Joint Ventures: This Time We Blame the Victim). Most of the business entity problems our China corporate lawyers deal with stem from poorly planned and executed JVs or badly formed WFOEs. Our China corporate team has recently been helping a couple clients deal with the negative repercussions of utilizing a Chinese representative office when their Chinese operations have far exceeded the legal scope for a representative office.
In Vietnam, single and multiple member LLCs are common, as well as shareholding companies (joint stock companies). General and limited partnerships are also available, but like the U.S. they are less common than LLCs and shareholding companies. Multiple member LLCs are limited to 50 members, where shareholding companies require at least three shareholders and have no maximum. For companies looking to issue corporate bonds or be listed on a Vietnam stock exchange, a shareholding company is the only available entity.
Thailand has a variety of partnerships (ordinary, registered ordinary, and limited), as well as private limited companies and public companies. Private limited companies are most common for international companies entering the marketplace. Like many countries, a joint venture entity where a foreign owner owns less than 50% of the ownership interests will not be considered a foreign-owned entity.
Indonesia also has civil and limited partnerships, co-operatives, and limited liability companies (PT PMA). Limited liability companies are most common and can be public or privately owned. Most foreign companies will not immediately jump into forming a publicly owned limited liability company. At least two owners are required at formation.
It is also possible to form the right entity in a foreign country but be significantly out of compliance with unusual and unexpected domestic requirements. These include minimum paid-in capital requirements, local representation requirements for a certain number of board directors or other high level positions, such as an Indonesian human resources director, who cannot be a non-Indonesian national.
When taking your company international, the details matter. That can be a hard thing for a U.S. based company to remember because most U.S. jurisdictions are exceptionally laissez faire compared to foreign countries. Thorough research and planning can avoid choosing the wrong type of entity and getting your company and key personnel in the wrong column of the foreign government’s checklist.