Starting a New Business in China (Pt 1): Legal Entity
By Toffler Niemuth
For the non-lawyer among us, forming the legal entity for a new business can act as a small roadblock in the early stages. In China, formation can be a much larger roadblock, especially as a foreigner trying to navigate countless ministries, language barriers, develop the necessary guanxi, and just generally figure out how the system works.
Due to this, my idea was to have my business started in China in the name of a local partner who’d be responsible for all government, incorporation, and tax issues while leaving me with execution and operations side of the business. In fact, its much easier for Chinese to start a business (in China) than foreigners. Indeed, Chinese persons only need CNY1 to be able to start a business. Anyway, I thought this was the best plan, but then questions of selling, repatriation of profits, etc started to creep into my mind so I sought additional advice.
A fellow American entrepreneur in China suggested I incorporate a holding company in Hong Kong which would then open a wholly foreign owned subsidiary (WOFE) to operate in Mainland. This allows the HK parent company to be bought and sold without ever touching the subsidiary and therefore having to deal with title transfer in Mainland (apparently a nightmare).
I cross-checked this advice with another Australian entrepreneur in China who said this only works if you have operations in another country. According to her, the Chinese government doesn’t allow this method if you don’t have operations in another country, which I have no intention of having (initially, if ever).
Further research suggests I may not be eligible for a WOFE anyway as I intend to ’sell to the Chinese market’, well, more accurately provide a service to expats (and some Chinese) within China but I guess that’s still the same. According to that same site, my local partner could act just as I had in mind: “The local partner […] may be a silent partner who was acquired by the foreign firm simply to gain domestic market access.”
A different site suggests that information is outdated and therefore “With China’s entry into the WTO, these conditions were gradually abolished and the WFOE is increasingly being used for service providers such as a variety of consulting and management services, software development and trading as well. […] The advantages of establishing a WFOE include: Capable of converting RMB profits to US dollars for remittance to their parent company outside China.” By comparison to the Chinese who can start a business with CNY1, a WOFE requires registered capital of USD120,500.
Guess its time to consult a lawyer. In the meantime, I welcome anyone’s advice who has had experience with this.
Toffler Niemuth, Shop My Shanghai
April 5th, 2008 at 5:48 am
Nearly everything you say on here is wrong. There is no good way to start a company with a Chinese partner without it being a joint venture. If you are going to sell to China from within China, you almost certainly do need a WFOE. It is almost always easier to have that WFOE owned by a foreign company (though it is possible to have it owned by you individually), but that foreign company certainly not need be from HK; in fact most of the time for our American clients it makes sense to form a US LLC to own the Chinese WFOE.
I can tell a million horror stories of foreigners who tried to save money by having a Chinese “partner” start their business for them in China as a domestic company owned by the Chinese partner “on behalf of the foreigner.” Worst case scenario is that the Chinese partner runs away with the company as soon as it gets profitable.
April 6th, 2008 at 4:45 am
Some people shall be very careful when they publish so called “experts”. The first guy or girl who comes to town -here actually in Shanghai- she/he knows how it works here.
I can understand that there is a demand for China expertise on law and management but not everybody qualifies for it!
April 6th, 2008 at 4:55 am
I agree. I also do not think it is a safe entity for you, Toffler! Now I am working in a foreign company in the name of Chinese local in Dongguan as a Canadian boss’s assistant. The problem will happen is like the local man will interfere every field, finance, management,ect. which will make you headache.
Another, policy of the inner China and coastland economic area is different. So where is your ideal place for entity?
Anything you want to know more about China, you can contact me at: tinaleaf33@gmail.com
April 7th, 2008 at 3:44 pm
Dear Toffler
I fully agree with the first remark. This again shows what foreigners who want to start a business - big or small - should not do: listen to a handful of foreigners with some “experience” in China. There are so many lawyers and consultants interested in your business. They can give you some free advice, and for a fee help to implement your structure. See such costs are your start-up costs, if your business goes well then they are definitely worth it!
Anyway, as you would like an answer to the above questions, see below. But the most valuable advice I can give you: discuss your plans with someone who does this for a living!
- no, you should not invest through a “local partner” because if he turns on you, you will lose everything you have invested. Period. And since this happens a lot, don’t do it.
- whether you want to invest as an invidual, or through a holding company in Hong Kong or elsewhere is really not so important for small businesses. HK has tax and corporate advantages, but establishing a HK holding company as intermediary also brings costs. You have to balance this.
- you can establish your WFOE to sell to anyone, Chinese and foreigners in China, Chinese companies and companies abroad, though there are some limitations for certain products. This is related to your WFOE’s “business scope”. It all depends on what you want to do.
- regarding your investment: Chinese law sets a minimum registered capital (RMB 100,000 if only one investor), but competent authorities have the right to demand more depending on your business plan (your “Feasiblity Study Report”), and it is true, they do want you to invest as much as possible. But this is money that you will be using to rent your office, pay your salaries, purchase your furniture, and do your business. So it is not a cost, just financing.
April 8th, 2008 at 7:53 pm
Toffler, Congratulations on being careful and shrewd enough to ask the questions. You are well on your way to being successful.
In any business, you have to be careful who you partner with and how you establish the company. Either of you could choose to part ways later only to find the other has done something he or she shouldn’t have.
Legal anything in China can be daunting. And structuring a business can be challenging no matter where you are.
If you are serious about establishing a business in China, feel free to contact me directly. I can point you to genuine experts who will be able to help you. tmorgan@wudang.com
April 11th, 2008 at 7:54 am
WFOE is almost certainly the best way forward for this kind of service business. Of course being wholly foreign owned will mean that you need to have an entity outside of China to be the parent - but that can be set up relatively easily. If you are going to be making a sizeable amount of money and want to repatriate it to the States then it might be worth going to the expense of setting up a company in Mauritius to own your Chinese entity because the tax treaties between China/Mauritius/USA make it relatively easy to repatriate dividends etc without paying too much tax.
In the meantime you are going to have to spend a bit of your start up capital (RMB 100K) to rent yourself an office to be the registered address for your company. The office has to be class A Office Accomodation, your landlord needs the right paperwork to be able to rent the place for a foreign business and you won’t be able to use your own apartment as the registered office.
Have a chat to a lawyer about all the paper work - lots of people can do a simple company registration for you so shop around.
I’d also recommend spending some money hiring a local accountant (doesn’t have to be CPA but some experience of working in a small WFOE would be helpful)to be your assistant to make sure the right taxes are paid each month, right accounts are files etc.
China can be a minefield of regulations and you don’t want to have to pay law or accounting firms every time you make a decision.
Good luck!
April 18th, 2008 at 5:34 am
i think if you plan everything well and find a really good person in china,your business will start safely.
come on! trust yourself!don’t loose your passion!
April 19th, 2008 at 7:35 am
There is no doubt that Maarten Roos told the most truths.
As a consultant specially been provided formation services to foreign investors, I set up more than 150 WFOEs for them.
In fact as a foreign investor he/she need to know is much more than he/her like to learn. But please remember this, if you really know everything about how the most suitable company for you to be set up, then you must have obtained a lot useful knowledge to succeed in your China biz.
May 5th, 2008 at 8:30 am
Your best bet is to find the right foreigner with real experience in setting up a WOFE in China. This is not easy to do since there are many foreigners who are ready to take advantage of other foreigners entering into the China market. Be careful in doing so and good luck!
Email me if you need further assistance: hartmann.bert@gmail.com
May 7th, 2008 at 6:20 pm
forget all these gold digging consultants, foreign or chinese just follow a few simple rules…
1. set up an offhsore company (BVI etc) in HK
2. use the BVI company to establish the china company ( i.e the BVI company owns the china entity not you)
3. use a local chinese accountant to register the business
why?
1. you can sell the business as a share transfer and keep the profits offshore
2. the cost is less…no unecessary expensive consultants
3. you are in control
forget consultants, forget local business partners…they both want to cheat you.
why am i so cock sure of myself when i say this? because this is how i set up my wfoe and i have no entity in europe use or anywhwere, china was my first business set up and im british