Starting a business in China can be a difficult task, filled with nuance and knots, which can be a culture shock for US citizens who might be used to the more straightforward process of business formation. For that reason, it’s always best to go in prepared for the opportunities and obstacles, preferably with an agent who knows the legal and cultural hurdles that are unique to China.
Beyond that, a bare bone checklist for someone starting a business in China should be: industry, city, renting an office, business entity, your five-year plan, documents for registration, registering your intellectual property, getting a bank, and finally hiring staff in China.
Right off the bat, you should be aware that China is one of the more restrictive countries to do business in. Certain industries, like forestry and financial services, are more protected than others, as was discussed in this article.
For that reason, you have a better opportunity to best position your business for success by checking out the Chinese government’s Five-Year Plan to see what sort of industries the Chinese government is seeking to promote. The Chinese government is also seeking to open the market and certain industries to more foreign investors under its Third Plenum Decision, which will hopefully have gone into full effect by 2020.
The vast majority of industries still remain open to foreign investors and business owners.
One of the most important (and necessary) considerations for your business is where it will be.
Additionally, geological positioning is of utmost importance. China has three major political and industrial centers: Shanghai, Beijing, and Guangzhou. Depending on your industry, some of these cities are better than others. Shanghai is well known for its manufacturing of communication equipment, automobiles, electronics, steel products, petrochemicals, and biomedicine. Beijing is well known for its pharmaceuticals and electronic industries, and is one of the leaders in bio-engineering and information technology. Guangzhou, which has been ranked as the best city to begin a business in mainland China, manufactures all sorts of items, from car parts to toys.
Renting an office
Once you’ve establish the type of business you’ll be setting up, and the city, you will need to rent an office. An office address is essential element when registering your business. But be cautious and ensure that the space your renting in is zoned for the type of business you are planning.
Next, before beginning the registration process, you will need to consider what sort of business entity to register under. Similar to business incorporation in the United States, China has certain categories businesses may fall under. In China, the entity types a foreign business owner may register under are: joint ventures, representative offices, and wholly foreign owned enterprises.
The differences between these entity types, with their pros and cons, could easily occupy their own article. For this reason, only a short comparison will be provided.
A joint venture is typically regarded as the best business entity to register under, and the one most likely to be approved. However, it requires a partnership between your foreign business and a Chinese citizen. However, many business owners fail to carefully vet their Chinese business partners, to ensure similar values and long term plans, which can lead to significant hardship down the road. And because the Chinese business owner is on his “home turf”, so to speak, it’s more likely that if a case between the two should ever be litigated the Chinese business arises the Chinese partner will win.
Representative offices are a low-cost, generally entity but come with the handicap of significantly limiting what sort of industries you can be in and what sort of business actions you can take. A representative office exists essentially to do as its name suggests – to represent your foreign business in China. Thus, you can’t provide services or products, or generate revenue.
The wholly foreign owned enterprise (WFOE) comprises the majority of foreign businesses in China and makes up 75% of American investment in China. However, though it may be commonplace, WFOE are very complicated to set up, more likely to be closely scrutinized by the Chinese government, and requires a minimal capital investment that must be put into a Chinese bank. This amount will vary depending on the industry your business is in and the city where it will be located.
What’s your five-year plan?
Once you’ve determined what sort of entity you’ll attempt to register your business under, you will need a five-year plan. It’s essential that you approach this plan carefully because once it’s approved you are only allowed to work within the guidelines of that plan. If you deviate from it, for example by trying to offer a service or product that’s not within the plan, you can be shut down. For this reason, broad strokes may be better, but the safest road is to get receive professional consultation as the government still expects a level of specificity. A professional can help ensure that you’re hitting the spot just right.
Documents for registration
Next, you’ll need to get the necessary documents in place. The documents you’ll need will vary depending on what sort of entity you’re registering as, and where you’ll be registering. However, be prepared to be flexible. There are countless stories of foreign business owners who brought in the proper documents but are then asked to produce other information, ranging from how businesses might work in the United States or to provide proof that you really have the knowledge to produce a good or provide a service. It is always better to just do as the government official asks. There is little to be gained in trying to tell them it is not necessary.
Now that you’ve registered your business, one of your next biggest concerns should be your intellectual property. Intellectual property law is still a sector of law that is in a state of great flux in China but there have been many cases within recent years which have showcased how difficult it can be for even the largest foreign businesses to protect their well-known intellectual property.
You will also need a bank now that you have a business registered in China. There plenty of reputable banks, including Bank of America if you’re looking for a familiar face. As a US business owner, you may find that you it is more beneficial for you to choose a bank that already has established ties with the United States, as it grants easier tracking of your money and overall transparency.
Hiring staff in China
Eventually, you will want to start hiring staff. Chinese labor laws are distinct from US laws and should be considered carefully before rushing into any major decisions when it comes to employees. This ranges from hiring, to employee contracts, to termination. An employee contract and employee mutual are essential for hiring in China.