From March 1st, 2010, the time the Administrative Measures on Foreign Entities or Individuals Establishing Partnership Enterprises in China takes effect, the foreign investors, institutional or individual, now have a new instrument to invest in China -- the foreign invested partnership enterprise.

For decades, foreign investors are only allowed to form Sino-foreign equity joint venture, Sino-foreign contractual joint venture and wholly foreign owned enterprise as well as foreign invested company limited by shares. However, for many small businesses and individuals who are also keen to share the benefits of China economic miracle, those old investment instruments may not suit them well, and they want more flexible investment tools. Now come the foreign invested partnership enterprises.

Unlike companies, partnership enterprises are largely run based on partner’s contractual arrangement, in which the structure, governance of such partnership enterprises are laid down with less statutory intervention. There is no specific requirement on the amount of registered capital, no board of director, no supervisors.

Under the new regulation, foreign invested partnership enterprises can be formed directly by applying to the registration department without having to firstly obtain approval from foreign investment department, which reduces substantially the procedural time and work in forming an entity.

Another big advantage is that partnership enterprises are exempted from income tax and profits earned will be deemed as personal income of partners and be taxed thereby only.

The down sides, compared to companies, are also obvious in two aspects. One, partners of partnership enterprises (except for limited partners) are not shielded by the limited liability doctrine as available to company’s shareholders, which means creditors of partnership enterprises may go after general partners’ personal assets to repay debts or obligation incurred by the partnership enterprises. Two, partnership enterprises often cannot grow big because of absence of good corporate governance. In reality, when partnership enterprise grows up, its partners break up.

Under Chinese law, basically, there are two types of partnership enterprises, namely, general partnership or limited partnership. You can choose to be a general partner or limited partner in a partnership enterprise.

For a full read of that new regulation, please click here: Foreign invested partnership enterprises-a new instrument for foreign investors