Starting a business in China is a big feat in itself. There are a lot of considerations to factor in and a different set of laws that one must follow to be able to have smooth-sailing operations in one of the world’s leading business countries.
Aside from that, you would be required quite a financial and time investment. To be able to get to a level where your business can operate without being stressed with all the technical details, there are things that you need to know before you even go out and set up a business in China.
But the reward from starting a business in China can be huge in terms of profit.
In this article, we want to show you the things to know and the steps required to start a business in China.
Benefits of starting a business in China
One of the primary benefits of starting a business in China is to get access to a new market.
Accessing a new market is important because it allows you to expand into a new region that would not otherwise be accessible to your products. This gives your firm a substantial advantage over competitors because you are able to serve a larger customer base.
The Chinese government has taken a proactive approach to enforce entrepreneurially favorable policies for both domestic and international businesses. Some of these efforts include assisting young people in the incubation of their ideas, encouraging creativity and innovation, and providing business subsidies to its citizens.
This helped not only local companies, but also foreign companies to expand in the country.
As a result of these favorable policies, it is very easy to find local business partners and investors in China. The youth are empowered, and the business environment is friendly. Both rural and urban China has plenty of resources for growth.
China’s continuous growth over the previous three decades has been aided by social, political, and economic stability. These three factors are one of the benefits that it is possible to enjoy when starting a business in China.
Finally, but not least important, the abundance of skilled talents can help companies to quickly expand in the country.
Young Chinese professionals are both talented and capable. Every day, Chinese universities produce millions of skilled workers. Bilingualism is also on the rise in China, with many people speaking both Mandarin and English.
Problems with starting a business in China
Benefits are the first part to consider if you want to expand into China, but this is only one part of the equation.
Understanding the problems that companies can face in China is also important to avoid risks and being unprepared when starting a business in China.
One of the challenges for foreign companies are related to the business culture. Entrepreneurs cannot think of going to China and apply the same business logics applied in the West.
Leaders and managers in China want complete compliance without question. Business people must respect people’s reputations and feelings in the workplace, their families, their friends, and society.
Another big challenge is the analysis of consumers. This is because it is not easy for foreign entrepreneurs to understand the language and the Chinese culture and these are fundamental in understanding the consumers and to know how to do business in China properly.
To succeed in a market like China, an investor needs to have a strong local distribution network and a thorough understanding of consumer buying behaviors.
Human resource management is another challenge that companies face. There are certain rules that must be followed by newly founded foreign enterprises in China.
A foreign corporation must have a thorough understanding of all Chinese rules and procedures to prevent any compliance issues, as policies change from city to city and year to year.
A foreign firm can either engage an experienced HR staff to handle employee payroll, benefits, and everyday HR concerns, or it can hire a professional HR outsourcing agency in China to handle employee payroll and benefits.
A more recent challenge is the one related to the working visa. With the COVID-19 pandemic, it has become hard to obtain a working visa to come to China to open a company, so many foreign companies choose to postpone the investment or enter China hiring employees to work for their company to start operating and testing the market.
The 10 things to know before starting a business in China
1) There are many ways your business can be present in China
When starting a business in China, there are actually a couple of options to get your company running. Depending on the type of business you have or the need of your business, you can research and try one of these options:
- A Wholly-owned Foreign Enterprise (WFOE)
- A Contractual or Cooperative Joint Venture (CJV)
- An Equity Joint Venture (EJV)
- A Representative Office (RO)
- A Foreign Invested Partnership Enterprise (FIPE)
A few of these options are cost-effective and will give you more opportunities to maximize the run of your business in China. It’s about trying the best one for your business.
2) Be accurate with the scope and definition of your business
The laws in China are quite stricter when it comes to defining the scope of business. The Chinese local authorities reserve the right to prohibit or restrict your business if the scope and definition do not align with China’s rules and regulations.
It is noteworthy that they can permit and even encourage you to set up your business in China if the scope and definition have been laid out carefully and accurately. To save time and to not let your efforts go to waste, make sure you set the scope of your business first, so you don’t run into complications with the laws when you are starting a business in China.
3) Carefully put up your business at the right location in China
Since 2008, China has abolished its preferential tax rates for foreign companies. However, you should know that there are still preferential taxes for foreign investors in terms of business nature and geographical location. It is important to know the right locations to put up your business to get away from added costs that would be unnecessary to you.
China Free Trade Zones, for example, have been a popular location choice for foreign companies in China for several years. These are economic zones where companies can operate under specially defined regulations. In particular, they offer preferential customs handling and initial import without paying duties.
4) Be knowledgeable with the minimum registered capital for your business to operate in China
Typically, the Chinese government has a definite minimum registered capital depending on the scope and nature of business. To avoid any future hassle due to foreign currency control policy, it is highly recommended to set a minimum registered capital based on your business scope and operation scale even though it is not required by law.
Before you even start acting on the actual set-up of your business in China, it is important that you know about the minimum registered capital for the type of business you have to avoid financial loss.
5) Know your responsibilities as an employer in China
Putting up a business in China would mean that you are a potential employer for a couple of employees.
In 2007, China has revised its Labor Contract Law and included clauses that addressed issues on employment contracts and redundancy.
Being knowledgeable about the updated laws will help you save more money and be a better employer to your employees. Termination of contracts with under-performing employees especially when the mistake is at your end for drafting a wrong contract can result in huge financial damage that must be taken care of as soon as possible.
Also, you need to be aware of Chinese Labor Law so you have an idea of the mandatory benefits and employee welfare and include it when you are coming up with a budget for your company set-up in China.
Setting up your business, handling the employees’ payroll and statutory benefits in China, especially for foreign companies, can be a very overwhelming, complicated task.
Moreover, different cities in China have different policies and it is very important to adhere to them. To ease the stress and minimize confusion in this process, it is best to consult an experienced and a licensed service provider about the best way to manage this process.
Thus, outsourcing the administrative tasks to a local service provider with strong local know-how is very common among foreign small and medium enterprises in China.
6) Be vigilant and do a thorough background check of your Chinese partners
We cannot deny the fact that scammers exist anywhere in the world. China is not excused from this. It is very important that you check your joint venture partner’s credibility. Before you even think of signing a contract with them, you should exhaust all means of research to know the truth behind your business partner. China is a foreign land and doing business with an offshore partner carelessly is a hassle and it can bring about complicated repercussions to you and your business.
7) Create a simple and understandable employee management system in China
Doing business in China is hard. Recruiting people to work for your business in China is harder. Maintaining and keeping these employees happy during the duration of their work in your company is the hardest part. If you develop a really good employee management system, it will motivate your employees to work harder while still maintaining a happy disposition while they are working in your company. A few things you can consider including in your system are:
- Staff training
- Performance assessment
- Career management
- Communications policies
8) Know the basic requirements of putting up a business in China
This would essentially be helpful for those who are looking into having a Wholly Foreign-Owned Enterprise in China. You will need to submit the following:
- Articles of Incorporation or Organization for the investor entity
- Copies of applicable business licenses
- A certificate of good standing
- A description of the investor entity’s business activities, along with supporting documents
- A bank approval letter
Note here that you will also need to provide the above-mentioned requirements in Chinese. That means you will have to have them translated too.
9) Secure and protect your company’s intellectual property
Since you’ve gone all the way to set up a business in China, you don’t want it to be a waste by losing the intellectual property to others. Be knowledgeable about Chinese intellectual property (IP) rights. The IP protection rights will provide a business with the protection and registration of trademarks, copyrights, and patents. Also, be aware that disclosure and other issues might affect and limit your application and will jeopardize your efforts of securing IP protection. If you are really serious about doing business in China, you should start processing the IP protection rights of your business as soon as possible so as to avoid any conflicts and disputes.
10) Know the culture in China
By now, it should already sink to you that you are actually doing business in a foreign country and you are the one visiting that country.
Knowing this, you should make yourself familiar with a couple of cultural practices in China, so you don’t jeopardize your business. It is very helpful to learn about the traditions and culture of the country and their practices when it comes to everyday interactions and communication.
Follow holidays, special occasions, and special cultural practices observed in China. When you know about these things, you will be able to draft a good benefits program that will address the needs of your local Chinese employees when it comes to their welfare. Also, in adapting to the culture of the country, you will be able to impress your Chinese business partners and it will show that you are very respectful of their culture; thus, gaining an advantage for you and the growth of your business.
A low-risk way to start your business in China
As you could see, starting a business in China is not so easy, especially for many small and medium companies that many times don’t have the resources to deal with company formation, taxes, HR, regulations.
In China, it is possible to start a business in an easier and low-risk way.
Companies can use an EOR (Employer of Record). An EOR is a company that provides services under which an employer can delegate employee management tasks such as payroll, employee benefits, and workers’ compensation.
Simply put an EOR in China legally employs your staff in China on your behalf while you don’t have a legal entity established in China and seconds them back to you under a service agreement.
In this way, the EOR provider becomes what is called an employer of record, bypassing the difficult process of setting up an entity in China and making, in this way, the market expansion a lot easier.
Contact us if you want more information about this service!