Establishing a Foreign-Owned Restaurant Business in Beijing
Stephen Lou
For all of us (foreign) ‘locals’ in Beijing, we have seen the massive growth in foreign-owned restaurants over the past several years. Not only are such establishments popular (and very profitable), they are adding to the international cuisine and outlook of the nation’s capital. In this article, we outline the various procedures required to establish a restaurant. (There are alternatives in establishing a management office first, then a restaurant as a branch of the office; however, we will discuss this in later articles.)
Business Entity
In order to establish a restaurant, the owner must decide what type of entity will own and operate the establishment. In China, this is much more difficult than in other markets such as the US, where individuals can own and operate businesses. Fortunately, the restaurant industry is quite open and the operating entity may be either a Wholly Foreign Owned Enterprise (WFOE) (owned by a company or individual) or a Joint Venture (JV) (if partnering up with a Chinese national), though it is not possible for a foreigner to own the restaurant business directly as a sole proprietorship. Further, to open a restaurant, there are additional licenses and approvals that are necessary in addition to the traditional requirements of a limited liability company. However, once the company is set up with the proper business scope and registered capital, it can be used to open additional branches, though, of course, each branch will require certain approvals for that specific location (see below Health and Hygiene, Environmental Impact, etc.)
Unless there are compelling reasons otherwise, such as locating and trusting a suitable Chinese partner, the WFOE, a limited liability company wholly owned by the investor, is the likely choice for foreigners, as it offers the most autonomy. Although previously quite common and unfortunately still prevalent, for the sake of simplicity, many foreigners opt to allow Chinese partners to open the restaurant as a domestic (Chinese) company. In this case, the Chinese partner(s) will be sole shareholder(s) of the company, leaving the foreign investor with no legal ownership rights. (Given the often very large upfront personal investment, we caution investors to consider the appropriateness of such an ownership structure.)
Initial Procedures (Unique to Restaurants)
In chronological order, the following procedures must take place prior to establishment of the business entity, itself:
i) Apply and obtain company name approval notification with the Beijing Administration of Industry and Commerce (BAIC)
The name (in Chinese) will be in composed of, and in the following order:
Part 1 - City of WFOE: In this case it would be: Beijing; Part 2 – Company name (i.e. Bill’s BBQ); Part 3 - Business type (i.e. Restaurant); Part 4 - Form of organization (i.e. Limited Liability Company).
All together, the Registered Chinese name would read: Beijing Bill’s BBQ Restaurant Co., Ltd.
It is advisable that the applicant chooses at least three names to be checked for availability. The company name should be consistent with the actual business type, and should not explicitly or implicitly step beyond the scope of business.
ii) Selecting a Restaurant Location
The location of the restaurant is obviously important from a business standpoint, but based on the Beijing Municipal Environmental Protection Bureau’s (BMEPB) regulations if the restaurant is located near residential areas (within 50 meters), the residents will need to approve. At this point there are no regulations defining “approval by the residents”, and, currently, the BMEPB has found the following to be sufficient (depending on the circumstances): survey or completed questionnaire of residents, and approval letter by the local residents association.
iii) Apply and Obtain Health and Food Hygiene License with the Municipal Health Bureau
Various documentation must be furnished, including but not limited to the location and site map of the restaurant and the restaurant’s internal health and safety rules. Within 10 days of the documents submission, the Health Bureau will notify applicant and arrange the on-site inspection. The primary areas of inspection will include the hygiene and safety of; 1) raw foods preparation area; 2) kitchen area; 3) employee changing area; 4) faucet and sink area; and 5) waste disposal area. Inspectors should provide an on-the-spot list of non-compliance and recommendations to remedy the situation. For certain minor problems, a submission of a photo by the applicant of the modified area should suffice, so as to not require a second visit by the inspector. Notification of approval, assuming all areas of inspection do not require repeat visits, should be within 20 days.
iv) Alcohol Permit Registration
Though the registration of Alcohol Permit will not be completed until after issuance of the business license, Tax Registration Permit, and Health and Food Hygiene License, the applicant will need to reflect its intent to sell alcohol in the Health and Hygiene application. The Health and Food Hygiene License application will need to include the approved wording in the business scope to note that it will sell alcohol.
v) Environmental Protections (EP) Examination and Approval (District Level)
Restaurant applications do not require a separate EP Impact Report. The two forms required include: 1) Environmental Impact Application form – to be completed by the applicant; and 2) Environmental Impact Report Form – to be completed and stamped by an authorized environmental evaluation entity.
The Report Form shall primarily examine, among others, the following: an environmental evaluation of the indoor and outdoor surroundings and near by building, an environmental analysis of the site, potential and future environmental impact of the surroundings, and recommendations for environmental protection. The primary focus of the environmental impact application is to assess potential and actual noise and water pollution, fire protection, and waste disposal of the site.
In selecting a restaurant location (see above) it is important to note that the outdoor smoke ventilation exhaust fixture shall be located at least 20 meters from any residence or above any residential area.
vi) No Tobacco Permits
As of March 2007, the laws state that foreign commercial enterprises are not allowed to sell tobacco related products. Those foreign enterprises currently selling tobacco will not be permitted to sell these products after their permits expire in late 2008.
Establishing the Entity: WFOE or JV
vii) Apply for Approval Certificate
Once all the above approvals are obtained, they shall be submitted with the articles of incorporation, and feasibility report (along with supporting documentation) in order to obtain the Letter of Approval with the Beijing Municipal Bureau of Commerce.
viii) Registered Capital
The registered capital is the stated amount of capital that will be invested in the business. The registered capital will be reflected in the company’s articles of association, and recorded with the relevant government authorities. Since the entire amount of the registered capital must be invested (subject to cancellation), it is a very important legal and business decision.
Though the minimum amount of registered capital, based on the Company Law, may be as low as RMB 30,000, this will definitely not be applicable for restaurant companies.
Note that the investor is allowed to contribute non-monetary registered capital, among other things, in the form of technology/intellectual property rights. Cash contribution to registered capital may not be less than 30%.
ix) Capital Contribution
Capital contribution may be made through a lump sum payment or by installments. The lump sum shall be paid within 90 days from the issuance of the temporary business license. If paying by installments, a minimum 20% shall be paid within 90 days. The total amount shall be paid off within 1 year from the date of the establishment of the company.
x) Apply and Obtain Temporary Business License with Beijing Administration for Industry and Commerce
With the Certificate of Approval, the applicant may apply and obtain the temporary business license. The restaurant cannot begin operations at this point.
xi) Additional Certificates to obtain Permanent business License
Once the temporary business license is issued, the applicant may apply for the various approval certificates and the injection of capital. Before the permanent business license the applicant must obtain the following certificates, reports, and take care of the following banking issues:
• Organization Code Registration Certificate with the Organization Code Bureau;
• Tax Registration Certificate with the Taxation Bureau;
• Statistics Registration Certificate with the Statistics Bureau;
• Foreign Exchange Registration Certificate with the Foreign Exchange Supervision Bureau;
• Exit-Entry Administration Bureau of the Public Security Bureau registration
• Open RMB Basic Bank Account with the Designated Bank;
• Open Foreign Currency Capital Bank Account with a Designated Bank;
• Inject capital after the opening of Foreign exchange capital bank account by the client; and
• Capital Verification Report with a Chinese CPA firm.
xii) Permanent Business License with the BAIC
With the permanent business license issued the restaurant will be legally established and can fully operate within the business scope.
Other Issues
xiii) Logo / Trademark Registration
As China is a first-to-file jurisdiction, the general rule is to register any trademarks as soon as possible, basically meaning whoever files first is presumed to be the trademark holder. The company logo, and the Chinese and English names can be registered with the China Trademark Office.
xiv) Carve Company Chop (seal), and other related chops
Once the business license is issued, and the company has registered with the Exit-Entry Administration Bureau of the Public Security Bureau, the applicant can apply for the chops of the company, the legal representative and other related chops with the Public Security Bureau. They will designate an authorized carving seal agent to carve the chops.
xv) Other Applications and Registration
• Register business license with the district Administration for Industry and Commerce and with the district Municipal Bureau of Commerce
• Finance Registration Certificate with the Finance Bureau
• Customs Registration Certificate with the Customs Bureau
Conclusion
All foreign investors setting up a business in China will be presented with many obstacles. Establishing a restaurant will add many other variables to the issues involved. Proper planning, professional advice and set-up can reduce and avoid unnecessary delays and risks, so that the business can begin to operate and generate income.
Stephen Lou, foreign counsel with Grandall Legal Group is part of the International Practice Group. His practice involves international corporate and commercial transactions, including FDI, franchising, mergers and acquisitions and general corporate matters. Stephen received his JD from the Santa Clara University School of Law, and is admitted to the California bar. He is a standing member of China Chain Store & Franchise Association. You can contact Stephen at Stephenlou@grandall.com.cn or learn more about the firm at www.grandall-profile.com.
September 21st, 2008 at 9:25 am
[…] the inner chef: Advice for foreigners who might consider opening a restaurant in Beijing. [China Success […]
September 26th, 2008 at 5:22 am
Stephen, Why do you forget to mention about the payoffs/bribes needed to the local police and other officials?
This is real life and not some classroom theory. Your article reminds me of some propaganda put out by the Chinese newspapers.
Actually I’d love to hear you say that is not needed when we both know that it is a fact of life today in China and has led to many closures of businesses in China and especially Beijing restaurants!
September 27th, 2008 at 7:47 am
I have opened many restaurants legally in China and I can tell you that using a law firm to set up the company is expensive and non-productive. The problem is with all the licenses and these are generally done by smaller local companies who want to do the whole registration process. It generally comes down to how well the local licensing company knows the local fire, health and environmental officials who need to approve each license. Bribes are usually a necessary part of the process from my experience but that is best left to the “consultant” you use. If they see a laowai face, the amounts will be much higher.
October 3rd, 2008 at 3:47 pm
J.Silverstein:
I am thinking of JV-ing with a Chinese to open a dessert store. Do the rules apply to my business type too?
What type of visa should I apply to enter China? As a tourist? Can I change the type of visa while I am in China?
Thank you.
October 3rd, 2008 at 5:09 pm
@Sutthichai
Do yourself a favour and do your own on location market research for several months at least.
Especially in hospitality, a number of foreign “JV” partners got ripped off badly. Tread carefully, protect your know-how, scrutinize everything and hold on to your cash.
October 4th, 2008 at 1:57 am
@Sutthicai
Yes all the rules apply to all restaurants but many locals operate desseert stsnds with no licenses at all and avoid taxes. Eventually the police show up and shut them down so I recommend you to everything legally. I personally do not recommend JV’s with Mainland Chinese unless you know the partner very well and can trust them. Remember if you are not there all the time you lose control and someone else is handling the money. I know a very nice group of Chinese from Toronto who opened several restaurants with a local group and closed everthing down after one year after losing a lot of money. They flew in from Canada all the time and lost control.
If you are thinking of doing desserts I suggest you consider Asian desserts only.
October 4th, 2008 at 9:37 am
Thanks, Thomas, for your warning.
I am also planning to spend some 3 months in China for serious research and ‘hands-on’ experience in my Chinese friend’s small store to make sure if my pre-assessed gut feel about the prospective of my products is right. I am really conservative. We have talked about expanding it. My intended investment would be small, just meeting the minimum capital requirement.
However, I don’t know what type of visa I should apply for? Tourist? Could anybody please provide info on that? I would appreciate it.
October 4th, 2008 at 9:49 am
Thanks, J.Silverstein.
Yes, my JV partner is a mainland Chinese. I am a Thailand-born Chinese Canadian Thai. :)
As a conservative investor, I am not going to open a ‘big-time’ store in one strike. And I am going to be present in China most of the time, not to leave my total fortune with my business partner. My business partner is the son of a poor migrant labour family from Anhui. He is inspired and wants to elevate his mom and dad’s lives from poverty. I have known his family well.
October 8th, 2008 at 5:10 am
To respond to bodecker, I do not discount the multitude of obstacles and practical issues with opening up a restaurant or any business in Beijing. In fact my article indicates just how many steps there are to set up in China. Be aware that payoffs and bribes will in the long run cause more problems for the business leading to very “many closures of businesses in China and especially Beijing restaurants” you speak of. Though a reality in China, it does not negate proper planning and the required procedures I mention in my article.
As for setting up a JV for a restaurant, that will greatly depend on your specific situation and one’s trust level with Chinese partner. Certainly we know of stories of the ripping off factor. I agree with Thomas, that you must scrutinize everything and conduct your own research. Part of being diligent in setting up your business is proper entity planning. The procedural portions (waiting in lines and filling out the paperwork to obtain the approvals) I have mentioned is only a small part of the planning. Proper structuring, and anticipating future breach and liability issues set out in the articles of incorporation and collateral agreements will be vital in the future success of your company and the minimizing of the risk and closing down of your restaurant due to improper planning and licensing.
October 8th, 2008 at 9:41 am
Stephen, I really can’t believe what I just read, maybe you made a mistake or I read it wrong. I really want to get you “on the record” here. But as you want to direct your reply’s to me and make it personal we can do that.
Are you saying that with your help that setting up the restaurant it is not needed to participate in bribes and payoffs?
If you really wanted to make clear the “required procedures” then why did not mention the payoffs and bribes initially in these steps?
Was the goal of the article to help people or to sucker them into being a customer?
I also find your previous comment about using an agent to pay all the bribes very funny. Then you are a hostage to the agent and anytime he wants money he can say the police and govt is shaking him down. What do you recommend when they come, go and call the agent and hope he is available?
Are you really blaming the closure of many places because they did pay the bribes? WOW! That is amazing. So what do you recommend when the police or fire or some govt official comes and sits down and will not leave till they are paid? What do you recommend when the place is closed for not paying the right people, even when they have been paid and everything was done correctly?
I still consider your article naive and one sided to entice people to doing business in China without letting them know of the downside to merely line your pockets and get your fee and turn them to the wolfs.
This behavior I find very common practice in China and I will warn others from doing business with people like you who do not educate or warn people about the full picture.
This is why people come to china, get cheated and lose a lot of money and then leave. Only leaving the local shysters, agents and vendors to profit and China with a reputation that will take decades to fix.
I really find you very irresponsible.
For anyone reading this, I am an American who has been her for over 5 years, have a Chinese wife and Chinese company and work very hard to keep other foreigners from being ripped off by others.
Even having many connections and contacts in high places, it is still needed to know when and how to pay some people off in order to even get simple things done.
People who pretend that china is clean, and virginal and you will have no problems if you just trust some irresponsible person like Stephen. I’ve done business this way before often), promises are made, time frames are given and ignored, important information is withheld that is crucial to success.
I am constantly amazed that Chinese can not learn that foreigners wish to be informed of all the details and facts and make their own choices about money and business and not be kept in the dark. The norm here is to hide information from the boss and hope he does not catch you and force you to lose face, even if you costs the boss all his money and livelihood.
I love China and have made it my home, sticking your head in the sand to hide is not the right way to do things and no way to promote change or to help improve China, and for you as a professional and a lawyer to omit these things is criminal in my opinion and all too common and typical.
I choose to do business with people who are honest, open and trustworthy. People who are responsible for their actions and are not China apologists nor China deniars.
I am sure Stephen could claim that he can not write the truth about business in China for fear of what will/could happen to him, well then I’d rather see him not write anything other than just give some 1/2 truths.
I think Stephen has been very clear and shown which type of person he is. BUYER BEWARE!
October 8th, 2008 at 12:13 pm
I think these discussions are very useful but I don’t think it makes sense to beat up on Stephen. Everything Stephen suggested from a legal standpoint is correct but this is all available in Chinese from the Government website. This information is necessary but insufficient. Unless your Chinese lawyer has actually run a business he/she cannot really be in a position to give you the real scoop on how to get your licenses. I discovered that in the first mall where I had a restaurant that over half the food service outlets had no proper licenses. When I mentioned this to a senior lawyer at a prestigious internatonal law firm he told me that it was inconceivable this could be the case. The biggest problem in China is the lack of transparancy regarding the various licenses required to register a restaurant branch. Rules differ depending on the municipality so the more discretion government officials have then the greater the risk of being hostage to their power.
I stand by my earlier statement that using lawyers for the restaurant business makes little sense and it is better to work with a local registration services company that has a good track record of getting licenses and registrations done for food service businesses. I learned the hard way and wasted much time and money in the beginning until I could find the right group of people to help.
October 9th, 2008 at 6:08 am
Thanks, everybody, for sharing your experiences. Looks like I need to travel to China ASAP.
January 13th, 2009 at 1:39 pm
message for J. Silverstein
Would you be kind enough to give the name of the local registration services company that has the good track record please?
Thank you.
January 22nd, 2009 at 8:43 am
As a foreign lawyer based in Shanghai who has establshed numerous food & beverage enterprises in China for foreign clients over the last 10 years, some of the comments/criticisms are a bit simplistic. While agents for obtaining licenses are part of the process, many entrepeneurs who set up F&B do so with the intent to expand in the future in China, whether by outlets or using a franchise model. In such cases, trademark registration, franchising agreements, IP licensing and Confidentiality/Non Competition arrangements and taxation structuring are all vital. Filing agents will not be in a position to advise you how to properly document these issues.
January 23rd, 2009 at 9:22 am
I don’t disagree with Richard but doing all the things he outlines will be very costly for an entrepreuner. Better to see if your concept works first before starting all these processes which from my experience are far more expensive than originally anticipated but are definitely necessary if someone wants to expand in the future. And good luck to anyone trying to protect their trademark in China unless they have very deep pockets which most entrepreneurs don’t have.
March 25th, 2009 at 3:51 am
Thanks to you all, it is very instructive, so I derive that apart from having a very complicated registration process involving lots of different departments and bureaus, there are also lots of hidden costs to simply make things work, and then when you think that all has been settled and you have your permits and can start to generate revenues, you find yourself still in the grip of these same petty officials who consider you as a sort of cash cow, and yield enough power to close your business, what with all you invested already.
Well….must be zen to keep on going.
April 3rd, 2009 at 7:41 am
For those in doubt, check and see how many bars/rest/clubs have been shut down in beijing lately by the fire marshal. I know of at least 6 instances in the last month. Some 2 or 3 times and usually at the right time, like before an opening or big party. Even new offices being set up will have to deal with this problem.
Will money fix this problem? YES
Will it happen only once? NO
You need to make this part of your budget and plan.
brian in beijing