Starting a business in China – WHAT are your options?

3 August 2014, Comments: Comments Off on Starting a business in China – WHAT are your options?

You have a business idea, you have pulled together some capital, and perhaps some potential partners; or maybe you already have a business, and you want to move into China. One of the most important parts of the process is to determine which of the various options for foreign enterprises or individuals seeking to do business in China best suits your situation. In this post I have put together a brief summary of four main options.

In Chinese: 外商独资企业 (WaiShang DuZi QiYe)

This is a for-profit limited liability company which is wholly under the control of a foreign investor. The term 股东 (GuDong) literally means “shareholder”, but here is best thought of as an “investor-owner”. The investor-owner may be a foreign individual or individuals, or a foreign company. One person will be designated the legal representative (法人代表/FaRen DaiBiao). The leadership structure can be kept quite simple. This type of enterprise gives the owner-investor a relatively large amount of freedom in operating and directing the business, as well as control of net profit. However, there is an enormous amount of work and many details involved in setting up and running this kind of business. Foreigners have been known to do it all themselves. Normally, though, a Chinese employee will be needed to work on this full-time for the set-up process and, on average, half-time for the continuing operation of the business.

In Chinese: 合资企业 (HeZi QiYe)

This is a for-profit limited liability company which is jointly owned-invested by a foreign company along with a China-registered company. Some of the advantages of a registering a JV are that you may be permitted to conduct business in areas which are not permitted or restricted for WFOEs, and you have a Chinese partner with a vested interest in making the venture successful. The downside is that you cannot unilaterally make any and all decisions for the new enterprise. The foreign partner will want to ensure the Articles of Association are formulated in a way that reflects the powers and freedoms required. Even with the best will in the world, the two partners often discover later that their venture is undermined by conflicting perceptions and assumptions that were not apparent at the outset.

In Chinese: 外商投资合伙企业

This is an unlimited liability business entity with no minimum requirements on registered capital. The minimum number of partners is 2 and there is no requirement for the nationality of a partner (i.e. they may all be foreign). A partner may be an individual, legal person or other organization. If you can deal with the unlimited liability part, this one is a lot less complicated than WFOE or JV.

In Chinese: 代表机构 (DaiBiao JiGou)

This is often called a “Representative Office”. It is far easier to set up than either a WFOE or a JV, but it is not an enterprise in itself. It is the representative of a foreign enterprise. The parent company must have been established for more than 2 years and may be required to demonstrate recent business activity and turnover. The FERA is not permitted to conduct profit-making activities. Indeed, it cannot receive payments from any Chinese individual or entity for anything. Where the foreign company has Chinese customers, payment is made directly to the foreign company, not to the representative office. FERAs are limited to engaging in conducting research, promoting their foreign company, coordinating their foreign company’s activities in China, and other activities that do not and are not intended to generate a profit. Chinese nationals can only be hired indirectly through contracting with a Chinese employment agency. A 10% tax is levied on gross expenses.

For more detailed information or for a consultation please contact us at XL Consulting.

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Rob Paix

Founder at XL Consulting
Founder and Executive Manager of XL China, Rob is originally from Australia but has lived much of his life in Asia, including 6 years in China. He particularly loves Xi’an and Western China. His varied career to date reflects his passion for aviation, travel, language and communication.

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