The Chinese market is one of the most sought-after places to do business, thanks in part to China’s enormous size, large population and steady economic growth.
Yet, there are many rules to starting a business in China. First of all, companies entering China must define their corporate structure. The company’s structure will impact numerous parameters, including business restrictions and expenditures, which are relevant to business success.
To start off on the right foot, we recommend that you ask yourselves the following questions:
- Do we have to establish a legal entity in China?
- If we do decide to establish a legal entity in China, when exactly should we do it?
In this short article, we will address these questions and provide valuable information. Prepare to be surprised.
Establishing a local subsidiary in China: Yes or No?
Many companies assume that in order to develop business operations in China, a legal entity must be established on local soil. But that is not necessarily the case.
In fact, it may be wiser to start off with initial caution. Before rushing in to establish a company in China, you can research the market and put together a local team that can help you achieve local objectives. In fact, you can start “doing business” without a local subsidiary. Once your business volume justifies opening a subsidiary in China – then by all means, you should go ahead and do it.
Why be so careful, you ask? Because setting up an entity in China is a huge decision. It costs money and has major implications. Once you do it, you will need access to specific China management expertise. That is why registering an entity should only take place after you’ve accumulated some local business experience, and made sure that you’ve evaluated everything.
Conducting business in China without an entity: Here’s what you need to know
We have two words for you: outsourced services. In China, local outsourcing providers can take care of practically anything, so that you don’t have to set up a formal entity. This includes goods importation into China, goods storage, payment collection, accounting services and even employee recruitment.
This may surprise you, but in China, you are not required to establish a local entity (WFOE) to conduct the following activities:
- Hiring local employees
- Employing foreign workers, including visa and work permit obtainment
- Renting offices spaces and signing lease contracts
- Managing all HR aspects, including payroll & expenses
- Manage Chinese financial requirements
- Import products into China
- Claim tax refund
- Storing goods in storage facilities in China
- Issuing RMB VAT invoices based on the products you sell (fapiao)
- Registering with WeChat and create an account
- Running digital marketing campaigns in China
Completing all of these important business tasks without having to commit to major business decisions – corporate structure, business models, affiliates, locations and more – is a very big deal. It makes things more flexible, and much less complicated. You can test the waters and even achieve success – with minimal commitment or complications.
So, what happens after you gain business experience in China? Hopefully, you will be ready to set up your own shop – and start doing things on your own. But when is the right time?
Here are certain scenarios that will help you understand that it may be time to establish your own WFOE in China:
- Your operations are generating significant, steady income
- You can trust the employees you’ve hired with important tasks
- You know where your business/operations are going to be located, and why
- You truly need your own business license – for example, to meet government tender requirements – and can no longer rely on a third-party business license
- It is better financially and/or logistically for your products to be manufactured or distributed under your own business license, and not a third-party license
- Your operations or planned business structure require you to open your own bank account in China, register your own ICP, etc.
Just remember: setting up and registering a company in China is not an easy task. Therefore, if you choose to do it, you should do it in an informed manner – and only after you have gained the appropriate knowledge, experience and insights.
This post was written by PTL Group. PTL Group provides management and operational support for international companies throughout their market entry and growth stages in China. PTL Group’s outsourcing services in China allow international SMEs to operate and profit from their day one in China, before formal subsidiaries are registered.