HOW TO FORM A COMPANY IN CHINA: THE ESSENTIAL GUIDE!
Believing that doing business in China is a simple thing that guarantees immediate success due to the size, the presence of other successful brands or just by hearsay, is very dangerous and can lead to bitter disappointments.
Not all companies can be successful in the Chinese market as it is absolutely different from other markets in the world. Even companies that have been successful elsewhere can find problems in China if they think of entering without proper study and preparation.
Due to the complexity of the matter it is highly recommended not to proceed alone, but instead to rely on a professional firm. Therefore, choosing the right partner is essential.
Before even thinking about starting a company in China, companies should clarify various important aspects that could affect their plans to land in China.
The most important aspect concerns the type of business that the future company intends to pursue. In fact, while for most industries there are no particular problems to operate in the country, some sectors are forbidden to foreign companies, and for others is required the establishment of a Joint Venture with local investors, where foreign owners are entitled to have no more than 51% of the shares.
Each year, the Chinese government publishes a new version of the “Negative Foreign Investment List” which states all sectors forbidden to foreign investors. Here you can learn more and find the 2020 versions in Chinese and English.
However, in the wake of the gradual opening up to international markets of the Chinese government, the negative list of banned sectors shrinks year after year.
Types of available Corporate Structures
When it comes to choosing the right type of business entity to establish in China, there are 3 main options to choose from: 1) a Wholly Foreign-Owned Enterprise (WFOE), 2) the Representative Office (RO), 3 ) the Joint Venture (JV).
Deciding the structure of your Chinese company based just on guts or first impressions is a common but dagerous mistake. In fact, sometimes projects carried out under a RO could be better accomplished using a WFOE for various reasons such as tax efficiency, human resources and other reasons.
In general, the most popular choice is the WFOE.
In this guide we have focused on the process of forming a WFOE in China. If you would like to check the details of a Representative Office and compare them with those of a WFOE, you can refer to another of our guides available at this link.
What is a WFOE?
The term WFOE stands for Wholly Foreign-Owned Enterprise and indicates a limited liability company wholly owned by a foreign investor.
A WFOE can legitimately sell goods and services directly in China, bill customers and receive revenues in RMB. Through a WFOE it is possible to convert corporate profits from RMB to US dollars and transfer them to a parent company (PC) outside of China.
The WFOE can be used to protect the intellectual know-how and technology of a company, as well as to fully recruit and control human resources. In addition, this type of entity ensures greater efficiency in business operations, management and future development.
A WFOE has legal personality.
How to Register a WFOE in China?