HOW TO FORM A CHINESE COMPANY: OPTIONS, CHALLENGES, AND SOLUTIONS!
Each phase must be studied and carried out with the utmost attention from the beginning as it is highly prone to errors that could cost dearly later in terms of costs and waste of time, as well as expose to serious liabilities.
1 - Decide How to Enter China
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.
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.
Thanks to our experience we are able to assist companies in their landing in China by providing various services including Market Research, Strategic Consulting other special supports that you may need such as SWOT Analysis or a Planned Gradual Entry.
2 - Find the Right Partner Firm
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.
Using a cheap agency is risky as they will comply with all your request, just telling you what you want to hear without warning you of the risks and consequences. An expensive law firm will only provide “right” answers, just saying what you can or can not do, focusing only on providing sure responses.
With our creative and flexible approach we are able to find always creative and alternative ways to handle the different situations of our customers. Over the years we have solved many problems of foreign companies that had fallen into the clutches of cheap and unreliable companies.
3- Choose the Right Company Structure
The best options available are a Wholly Foreign-Owned Enterprise (WFOE), the Representative Office (RO) and the Joint Venture (JV).
Deciding the structure of your Chinese company based just on guts and 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.
Our years of experience in the sector allow us to immediately understand the specifics of each case and to illustrate the pros and cons of each choice, guiding you towards the best solution for your needs.
4 - Decide the Business Scope of your Company
This is one of the most important decisions you have to make when registering a company in China, as it must include any business you intend to do in the future.
In China it is not possible to register a company for a general business scope and you should not decide to proceed with a scope that could be accepted more easily and quickly, but that wil be different from the real one, otherwise there could be problems in the future, when the business starts. It is therefore better to negotiate a more decent activity scope suited to the real needs of the business.
We will “create” a business scope suitable for your case, based on your intended activity, and will advise on the real chances of success.
5 - Additional Licenses Verification
Depending on your business, you may need additional licenses or authorizations for registering a company in China such as import-export licenses, food or alcohol sales, retail, financial services, and so on.
There may be errors when choosing a license or understanding its requirements which must be met even before applying for the license. In these cases, you might have to wait up to six months before starting a business like a restaurant or warehouse activities.
The licensing requirements are constantly changing and may also vary based on the province in which you register. Our skilled staff is always up to date on the latest regulations and licensing requirements, so they can advise you on the best thing to do and how.
6 - Accurate Location Choice
Picking a location for your company in China is not an easy decision: each city and even their districts may have different requirements related to your business type and structure.
Different districts of the same city may have different requirements in terms of required registered capital, type of office space needed, corporate tax and incentives, documentation to be provided, etc.
We can guide you among the various choices available, the requirements and special options like those in the Free Trade Zones (FTZs) for picking the right location for your business in China.
7 - Choice of the Right Ownership Structure
Should your new WFOE be owned by your parent company, a holding company, an SPV or an individual? Should the RO be “connected” to your headquarters or to another entity? These and other questions should be answered when choosing the ownership structure of your company in China.
Various factors should be considered in this choice such as tax efficiency, liability control, brand exposure, ease of management and future planning (for example: the transfer of the entity or the inclusion of new shareholders).
This is our field and we master it perfectly, we can then advise you on the different options and point you towards the choice that makes the most sense for you and your business.
8 - Choice of the Legal Representative
Before you can begin the business registration process, you must appoint a Legal Representative (LR) and Supervisor. It is important to choose the right person, trustworthy and responsible.
The LR is the most important person in your Chinese company as it is the person the company stamps are associated with, the person who shares responsibilities with the owner of the WFOE. You have to make the right choice, for example: a local or a foreigner?
We will find the right option for your based on the management style and the risk profile of your company, as well as on the effective availability of the staff.
9 - Selecting the Right Office Space
In many districts of most cities in China, you must have an office lease agreement for at least 12 months before applying for company registration.
In our experience this is one the major cause of delays and misunderstandings between applicants and authorities. Both the office (or warehouse, or retail space) and the lease agreement itself must meet specific requirements to be eligible for a company registration.
Our team of professionals can not only recommend the best solution for your case, but is also able to source the right office space for your new company.
10 - Choosing a Chinese Name for your Company
In the case you want to register your new company as a WFOE, you must first choose a Chinese name that best represents the brand and is able to communicate the company’s values. If instead you are applying for a RO, you must use the same name as the parent company.
It is not easy to choose the right name for a new company in China, as the authorities reject any name that seems similar to that of existing companies, both visually and in sound. Therefore, it may be necessary to submit a list of more than 20 names in order to obtain the approval of just one of them. Many companies choose a name whose sound or meaning recalls their original name, but which at the same time can be approved.
Since this step requires a deep knowledge of the Chinese language, it is essential to have a team of local professionals who can prepare a list of names to suit your case. We always adopt the best practices and make you part of the choice by explaining the meaning of the names and the reason for the choice.
11 - Setting the Registered Capital Amount
For the registration of a WFOE it is required to declare the intended registered capital, which must be approved by the authorities. On the other hand, ROs have no capital requirements.
China does not have a minimum capital requirement set for foreign-owned companies, but there are only general guidelines. However, capital requirements can change dramatically depending on the type of company you want to register and also on the business plan.
We help you to assess the right amount of capital that might be acceptable for approval, and to explain how and when it should be injected.
12 - Preparation of Forms & Documents
The list of forms and documents required for registering a new company in China varies depending on the type of company, ownership structure and management type of the parent company.
Often non-professional agencies, to be safe, ask to prepare many more documents and legalizations than those actually requested. This entails a significant increase in terms of costs and a lengthening of the time required for preparing the request.
We know what we do and we don’t make you waste time and money preparing unnecessary documents. We will provide you with a list of documents and forms needed for your case, although it should be borne in mind that authorities can always request additional documents at their discretion.
13 - Sign the Forms in the Right Way
Strange as it may seem, China has very specific requirements on how application forms should be signed, with requests regarding even the type of pen to use.
It often happens that applications are delayed due to problems with the signatures of documents: the signature does not correspond perfectly to that on the passport, the type of pen used is wrong, or more simply because the forms are in Chinese and have been signed in the wrong location.
We clearly tell you how to sign and where, and we check the forms in advance before sending them to the authorities in order to increase the chances of success.
14 - Understanding the Taxpayers Classification
The Tax Bureau classifies WFOEs according to different thresholds, dividing between small-scale taxpayers or ordinary taxpayers, and applying consequently different levels of taxation.
While in some cases companies can choose which class of taxpayers they belong to, many times it is not possible to decide independently, and this depends on the specific activities of the company and its expected financial data. In any case, it is very important to understand the difference between the various classes and the expected tax liabilities.
We explain you the differences between the classifications and which of them might apply to your specific case, taking care of the tax office on your behalf.
15 - Registration with the SAIC
The most important authority for the registration of a business in China is the SAIC, the State Administration for Industry and Commerce, which has an office in each district.
Recently the government has merged the functions of different bodies in one and it has created a unified license, the so called “5 in 1 business license” which includes the main business license, tax registration, organization code, social security and statistical registration.
After assisting you in collecting and completing all the required documents and forms, we will take care of submitting the application for you and following it up to approval.
16 - Obtaining the Company Chops
In China, the so-called company chops (company seals) are the main instrument of representation of a company, necessary for authenticating all the agreements signed by it.
At this point an English name for the WFOE must be assigned, which will only appear on the chops but not on the certificates. The chops carved for the company and its legal representative will be used to validate each document signed by the company.
As part of the registration process, we will take care of carving all the required chops for you and explain their importance.
17 - Opening the Bank Accounts
To be able to operate with your new company it is necessary to open at least 2 different bank accounts (usually at the same bank), each of them with a specific function.
This stage may need to be carried out in two different phases: one to open the capital contribution account, which is used only for capital injections, and one to open the operative account. Additionally, you may need multiple accounts in order to operate with additional currencies.
We will guide you through the steps required to apply for a corporate bank account with a major Chinese bank, typically ICBC or Bank of China.
18 - Registration with Other Authorities
Depending on the nature of your business, additional registration with other authorities may be required. Typical examples of this include registration for VAT, registration for import and export at customs (for trading WFOEs), licensing for food or alcohol, and so on.
It is important that these additional registrations are done correctly and that you know what to expect before starting your project. For example, VAT registration requires a dedicated and sealed computer and printer; a food license may require a warehouse, etc.
We usually inform you of these requirements during the planning stage and of course we help you to apply with the right authorities.
19 - Preparation for Hiring Personnel
A WFOE is allowed to hire staff directly just by registering for social security, the housing fund and more. On the contrary, a RO can only hire staff through a human resources agency.
If not properly addressed, the recruitment phase of local staff can lead to very costly mistakes, not only during the start-up phase, but also afterwards. The biggest challenge of hiring in China is not red tape (which can be outsourced), but rather addressing the mindset and expectations of the Chinese workforce.
With our experience we can help you with initial and ongoing HR fillings, running search for personnel (headhunting) and drafting employment contracts for you.
20 - Company Upkeeping
Chinese companies must file monthly and yearly accounts, tax and VAT declarations, auditing, as well as monthly filings about human resources.
Once your Chinese entity is ready, you will surely want to focus on developing this fascinating new market and not waste time with periodic registrations, audit reports, tax reconciliations and other red tapes that can simply be entrusted to us.
We can keep your books and carry out periodic accounting and tax filings and other corporate services, like processing trademark registrations.
We are a one-stop solution for your market entry and expansion in China,
the most reliable and effective partner for your business.
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