This is the 6th video of the Investing In China Chapter.

Today I am co-hosting this video with a serial entrepreneur Jim Filbird from California who has lived in China for over 20 years. Jim is a special guest and he is going to introduce to you the main differences between a limited liability company and a partnership. 

Jim and I will talk about what types of companies there are, and which one you should choose as an expat.

Choosing the right kind of company is extremely important. This applies to every industry, and this video will make sure you understand the pros and cons of each kind of enterprise before starting your own. The two main categories that you should be concerned about is a limited liability company, and partnership enterprise.

The main difference between the two is the degree of liability the owner takes. As we all know, there are risks in running a business. 20% of new businesses fail in the first two years, 45% in the first five years and 65% in the first ten years. Only 25% of businesses make it to 15 years and more. 

Being the boss is not easy. You have to balance the income and revenue in order to make a profit. Every month, I have to think of paying the rent and salaries of my employees, and in a bad month, I have to go into my pocket to pay them off first if there is no revenue for the month. Therefore, controlling risk and liability is very important for the owners of an enterprise to make sure that they do not personally go bankrupt when the business fails.

Let’s first talk about limited liability company. In an LLC, the liability of the shareholders is limited to the amount of registered capital. For now, all you need to know about registered capital is that it is an amount written on your business license. More will be explained on this in the next article.

The risk for the shareholders of a company are limited to the amount of registered capital. For example, if you are a 10% shareholder of a company with 1 million Yuan of registered capital, you only lose 100,000 in the worse case scenario of bankruptcy. Therefore, if you are thinking of opening a restaurant, trading company, or training centre, I would suggest you to go for a limited liability company. You can just close down the company and say goodbye to unpaid salary, rent and utilities bills when things go bad. Of course, I do not recommend doing so due to ethical reasons. You should still at least pay your employees as they have families that rely on them for food!

For partnerships, generally speaking, the liability is unlimited. Partnerships are further classified into common partnership and limited partnership. The difference between these two is that limited partnerships have limited liability partners in them. There must be at least one common partner in a limited partnership. This means that if the partnership has no money to pay off debts, you, as the common partner will have to pay out of your own pocket. So why choose this type of corporate structure? Surely everybody would go for the LLC instead!

This is true for most scenarios. However, trust is a very important factor in certain industries, like the legal, medical, accounting and consulting sector. Take the legal industry for example. All law firms are partnerships in China, so if there are serious cases of malpractice, the partner will be personally responsible for the damages caused to the client. This helps build trust and I also believe that you will feel more comfortable knowing that your lawyer will not close down the law firm and shirk away from responsibility when major accidents happen.

Please subscribe for more interesting legal facts!

1) 5 Must-Knows About Company Incorporation in China

2) How To Trade Safely With Chinese Factories

3) Is Chinese Partner Needed For Company Registration

4) How To Get Money Back From Debtors?

5) What Is Director And Supervisor?