AOL was careful to point out that the joint venture will engage in business that is "allowed under the regulations and government policies of China".
The new $200m venture will develop interactive services for the mass market.
"I believe this cooperation is a strategic move which will have a profound impact on the China internet industry," said Liu Chuanzhi, chairman of Legend.
The companies hope to combine AOL's marketing and technology expertise with Legend's leadership and brand recognition in the Chinese market for personal computer for consumers.
Gerald Levin, chief executive of AOL Time Warner, said: "Our announcement today in China is a major step toward fulfilling the promise of the internet around the world."
Waiting for WTO membership
Initially, AOL will provide technical support and consultation, as China is not keen on foreign ownership of content providers.
The Chinese authorities have welcomed the onset of the new economy but have been vigilant in policing information carried on China's sites.
AOL was careful to point out that the joint venture will engage in business that is "allowed under the regulations and government policies of China".
However, both companies are optimistic that China's prospective membership of the World Trade Organisation will allow them to expand the scope of their activities.
At the end of last week, the US and China finally reached an agreement on outstanding issues that have been holding up Beijing's 15-year old bid to join the WTO.
It is hoped that China will be able to join the trade body before November.
Sceptical
Some analysts were sceptical of the alliance because it could take years before AOL generates any significant return.
Nevertheless, the venture will give AOL a head-start among its international rivals in a market with enormous potential.
The number of internet consumers in China is poised to expand at a rapid pace, according to Michael Lynton, president of AOL International.
Legend already bundles internet access with some of its PCs via its www.fm365.com site, and had 1.7 million users of interactive services in May.
It also had 2.9 million registered e-mail users.
The company is a majority state-owned company, which is listed in Hong Kong. It has captured 39% of the market for consumer PCs in China.
America Online's service claims to have more than 29 million members in 17 countries.