If you decided to set up your business in China, having a proper business license is the very first step into the vast Chinese market. We help you determining the corporate nature (Representation Office, Joint Venture or Wholly Foreign Owned Enterprise) and during the business license application stage, we will assist you in arranging necessary administration tasks such us:
- Business Information: economical information, market analysis
- Location consulting: office space, factory premises
- Company set-up: legal procedure, taxation, loans
- Contracts: negotiations, cultural benchmarking, legal assistance
- Office set-up: design, telecommunications, IT services
- Head hunting for local and expatriate staff, work permit
- Sourcing: find, audit and select suppliers, supply analysis
Very often, people ask us specifically about starting a business in China. In the following you can find the basics on foreign related business structures in China. We will assist you determine the optimum solution for your company.
The current Chinese law recognizes 3 main types of business entities that have foreign interest. These are as follows:
- Type 1: A Foreign Representative Office
- Type 2: A Joint Venture (JV) company
- Type 3: A Wholly Foreign Owned Enterprise (WFOE)
Type 1: A Foreign Representative Office
This was the earliest and for a time the predominant form of foreign related entity that is allowed to do business in China. A so-called Rep office, as it is commonly called, can only perform liaison work between the foreign parent and local businesses. A Rep office cannot generate revenue in China and cannot sign or enter into any types of revenue generating contracts with local businesses. It is solely a communications vehicle that helps its parent company to do business with Chinese clients.
Advantage: easy to create, low cost.
Disadvantage: cannot invoice in RMB or sign sales contracts in China and can have negative tax consequences.
Type 2: A Joint Venture (JV) company
This used to be the predominant business vehicle for foreign companies. The foreign company provides the products, the capital and sometimes the management expertise, the Chinese company provided the local connections necessary for government approval and local market expertise. In China, a JV is a recognized corporate entity, which is a partnership between the foreign investor and the local Chinese partner. However, the JV is a corporate entity and not a partnership in the western legal sense. A JV can conduct business in China like any other business although there are certain industries that only permit 100% Chinese companies. With China’s entry into the World Trade Organization (WTO), the country is becoming more and more open to foreign businesses. A JV can enter into a vast majority of Chinese industries.
Advantage: immediate market entry with local market expertise and understanding of local practice and requirements.
Disadvantage: shared decision-making power, which sometimes resulted in conflict, delay or confusion.
We would recommend against entering into minority participation in a joint venture in all cases. There are instances in which the joint venture still makes sense but generally Wholly Foreign Owned Enterprises make the best sense today.
Type 3: A Wholly Foreign Owned Enterprise (WFOE)
A WFOE is a 100% wholly owned foreign subsidiary doing business in China. This is becoming increasingly the vehicle of choice for foreign direct investment in China. The WFOE is a registered local company but the difference with other local companies is that it is a 100% foreign ownership.
Advantage: absolute decision making power, no sharing of profits, more control over company operations, can be quicker decision making, more use of western business customs.
Disadvantage: lack of local knowledge, lack of local government connections, less ability to influence government permit, tax and other decisions.
The risk can be reduced by using expert assistance, hiring qualified local managers and building a quality staff. MKT has extensive experience in the registration of a WFOE and we have assisted many WFOE clients in various business ventures. We will assist you determine the optimum solution for your company.
How do I get a factory started in China?
Choosing the location in China to start your business and then choosing the form of your company are only the beginning. Then you need to decide on a region or a city and a site. Cost is one factor here. Also important are access to a stable source of trained labor, quality of local utilities, quality of roads and other infrastructure, proximity to ports, airports, etc. Additionally, you will need to register with required government agencies, select the right local or expatriate key company officials, file licenses, lease or build office space and production facilities, start hiring and many more issues. A large number of decisions have to be made and the chance for error can initially be great until you gain experience and confidence. The old saying “Experience is often the best teacher” is true. The problem is that often the lessons may not come cheap or without a tremendous expenditure of time and delay. A little help at first goes a long way and can save you time, money and business opportunities. We are here to help.
Where do I start?
Use our expertise and experience. We understand the law, culture and challenges of living and working throughout the region. We have people on the ground in most areas in China and access to top specialists who will handle your requirements confidentially and professionally.