China Company Formation Guide
In this article, we provide insight idea about China company Formation guide:
- Type of business presence in China
- Business formation process
- The process of entity formation in China
Nowadays, China is becoming one of the largest economies around the world. More and more foreign investors are attracted by China’s strong economic growth and are willing to expand their business to China. The land of China is considered to be the land of rising opportunities. China’s government is being outward-looking and accepts more and more foreign investors since joining World Trade Organization in December 2004. Given the fact that China is a member of WTO, setting up an entity in China demands less hassle. If you have are already decided to establish a business in China, this article will be very helpful to you.
Types of business presence in China
Mentioned below are three of the most common types of China company formation. Brief information about each is mentioned below:
1. Wholly Foreign-Owned Enterprise (WFOE)
A Wholly Foreign-Owned Enterprise (WFOE) is an independent limited liability legal entity, wholly-owned by one or more foreign investors, wholly foreign-funded. WFOEs may conduct business within their registered business scope. There are more and more companies tending to use service providers such as consulting and management services, etc.
The establishment of a WFOE does not require investment minimum registered capital. WFOE is an independent company that develops its own strategy and makes profits in the Chinese market.
The consulting WFOE has less registration process than Manufacturing and trading WFOE which is about 2 to 4 months. And the consulting WFOE only allowed to provide services.
The trading WFOF refers to the transaction of products within the business scope of an enterprise.
There are several advantages of setting WFOE in the Shanghai Free Trade Zone, Foreign investors can spend less time setting up WFOF in Shanghai Free Trade Zone. In the Shanghai Free Trade Zone, there has a prominent advantage that foreign investors can enjoy simplification of the procedure for applying for approval and registration within the Free Trade Zone. WFOE in the free zone will be treated as the same application procedure and requirements as inner investors.
2. Representative Office (RO)
Representative Office (RO) is formed by a foreign enterprise and it is not a legal entity in China. RO operates in China on behalf of the foreign parent company.
The establishment of an RO is a fairly simple way for a foreign company to exist in China, but there are limits to what they can do. For example, it cannot make any financial transactions directly and issue invoices.
As with joint ventures, ROs are becoming increasingly scarce as foreign investors choose to set up wholly foreign-owned enterprises in China.
RO mainly works on technical exchange, product promotion, market research, and some other related allowed activities in China. Moreover, it is an effective and relatively inexpensive way to expand in China, starting with the formation of an RO.
3. Joint Venture (JV)
JV is a special form of company registration in mainland China and foreign countries.
When China’s government began to implement foreign investment policies in its territory, JV was the main type for foreign companies to enter the Chinese market, and they achieved this by working with local Chinese companies and form joint ventures.
The increasing number of applications’ rejection year by year, discourages foreign applicants to set up a JV. However, in some restrictive industries, such as media, the operation of joint ventures is the only option for foreign companies to enter China.
There are 2 types of JV, which are EJV and CJV.
1. Equity Joint Ventures (EJV)
The joint venture is in the form of a limited liability company. This is a company with a legal personality, so it has obvious separation from the investors. It can have assets, and the responsibility for the transactions it deals with is the company itself. Investors’ liability is limited to their total contribution. Every investor has the right to distribute profits according to their contribution.
2. Cooperative Joint Ventures (CJV or Sino-Foreign Contractual Joint Venture)
Sino-foreign cooperative enterprise (CJV) is a Sino-foreign joint venture in China. Chinese companies often provide labor, land use rights, and factories. In the meantime, foreign companies bring in the necessary technology and key equipment, and capital. There is no minimum foreign investment required to initiate a CJV.
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Business formation process in China
Three types of entities are suitable for foreign investors who want to do business in China.
a) Wholly Foreign-Owned Enterprise (WOFE)
b) Joint Ventures (JV)
c) Representative Office (RO)
The process of entity formation in China
The following is the process of setting up the above entities in China.
1. Process of setting up WOFE and JV
Step 1: Name approval
Step 2: Office/facility space lease
Step 3: Environment impact assessment (for manufacturing WFOE)
Step 4: Record-filing receipt
Step 5: Business license registration
Step 6: Carving chops
Step 7: Open foreign exchange and RMB bank account
Step 8: Import and export registration procedures (only for trading WFOE)
2. Process of setting up RO
Step 1: Name Approval
Step 2: Apply for Registration Certificate
Step 2: Chops filing and carving
Step 3: Foreign Exchange Registration Certificate
Step 4: Open bank account
A Low-Risk Way to Start a Business in China Without a Legal Entity
The options mentioned above are benefits and risks, but we also should consider that not all companies have the budget, time, and resources to open a company in China.
Usually, opening a WFOE requires 6 to 12 months and many documents to provide to the Chinese authorities. A representative office is a viable option, but the problem is that you cannot make a profit with it, but only use it for marketing or research in general. For a Joint Venture, you have to spend a lot of time finding a reliable partner plus recently the government started to reject many JV applications, and this discouraged many foreign companies.
One solution that can help your company to enter China in a faster way and with low risks is called Professional Employer Organization (PEO).
In summary, what a PEO does is hire employees on behalf of your company. PEO services are built for foreign companies whose business operations require hiring local or foreign employees in China. While all employment, HR, administrative and legal matters are outsourced to the PEO, the end-client is able to have a physical presence in China without the need to set up a legal entity.
There are several situations in which foreign companies tend to outsource employment and use PEO solutions in China, including:
- Companies requiring to on-board local staff to handle ground operations (client meetings, sales support, supply management, etc) but the company strategy does not require the setup of a Representative Office or a WFOE.
- Foreign SME testing the Chinese market requiring to hire local staff for early market research, marketing activities, and exploration.
- Companies with an overseas-based contractor wish to base in China.
- Companies that intend to register an entity in China but want to hire staff in the interim period before formal establishment.
With a PEO, a foreign company does not have to think about all the employment relationships, payroll, and HR regulations, so the staff can focus only on the growth of the business in China.
We, at HROne, can guide you about how much investment you should have, to form a company in China or to use our PEO services, and about the mandatory requirements for a business to succeed in China!