5 reasons to switch your company to a China LLC
Easy setup, minimal tax requirements guaranteed, 100%
ownership, limited commitment. Proven draws for the Representative
Office. Why, then, do so many entrepreneurs each year swap the
safety of a Representative Office for speculation in mainland China –
either in the Free Trade Zone or onshore?
Simply put, it’s a logical progression of many a successful business.
Right off the bat, setting up a liaison office is prudent. Foreign Invested Enterprises (FIEs) currently liaise from the three biggest China cities alone. Inbound entrepreneurs can hop on the fast-track to launch via pre-packed licenses, employee visas, and corporate bank accounts. The paradigm works well for those who want to test the climate. However, as veterans may attest, a time comes when expansion and growth call for a Limited Liability license and migration to the Free Trade Zones or onshore business.
Representative Offices form an ideal starting point for any China business. They offer the chance for fresh entrepreneurs to establish their ventures in a unique and distinct landscape, and to learn its nuances. Diversification – vital for efficiently continuing growth – and relocation are, however, restricted. These restrictions are felt by many China businesses that have initially succeeded as a Representative Office but wish to further capitalize on and invest in that promising start.
We can see a common thread emerging. The entrepreneur who has invested in the foundation of their China business through a Representative Office, ready to strike into new territory once armed with knowledge and initial success. With the right company formation specialist, moving from a Representative Office structure to the Free Trade Zone or an onshore entity is a shrewd and manageable move.
We look at five reasons to hop the fence: to graduate from the Representative Office and secure the continued expansion of your best ventures in the deeply profitable mainland.
1. It’s necessary for growth:
After some time as a Representative Office, your company may be able to expand. One of the biggest draws of China is its deep, diverse and dynamic economy. Representative Offices are ably positioned to tap into this wealth but will invariably find their growth potential limited by clear-cut rules on staffing, offices and interaction with the mainland.
By their nature, Representative Office licenses confine firms to particular commercial buildings and they cannot do direct mainland business. If your Representative Office is to begin trading with mainland Chinese entities, you’ll have to pay customs duty, Value-Added Tax and potentially engage local agents who will charge for the service. If that all seems a bit cumbersome, you can open a mainland company in the Free Trade Zone or onshore in mainland China.
Now is a good time to consider the switch. The change in perception that this brings counts for a lot – a move to the mainland is a powerful statement of intent that partners, clients and suppliers will buy into.
2. It enables diversification:
For your Representative Office, growth might mean diversifying into new products, services or sectors. For mainland Chinese companies, doing so is easy administration. As a Representative Office it is impossible. Representative offices have a limited and pre-determined business scope. Representative Offices are essentially liaison offices and in China a liaison office can only communicate, cooperate and facilitate working relationships between people, companies and organization. It cannot negotiate deals, provide physical on-the-ground or overseas services nor trade in any goods domestically or internationally (including samples). The only foolproof way for a Representative Office to diversify is to turn to the mainland and (re)register. Only once setup is complete and a license is granted can you proceed and diversify. On the plus side, there’s no longer a third party deciding the fate of your business.
3. It unlocks further recruitment:
To live in China, a person needs to be sponsored either based on the ownership of a business in China, or an employment contract with an employer in China. It’s a common hurdle. Where Representative Offices have a further disadvantage is RO’s may not hire local employees directly and must rely on a government-authorized employment agency – called a Labor Dispatch agency. In addition, Representative offices are limited to employing four foreign employees only.
Visa rules for Limited Liability companies, whether in the Free Trade Zone or on onshore China, however, are more generous. Although the number of employees you take on must correlate with the size of your office or premises, you are firmly in control of both the size of your workforce – and of your ambition.
4. It gives access to lucrative government contracts:
Government tenders are a huge business in China – particularly in the areas of innovation, “green” development, Belt and Road Initiative, construction projects, etc. China is perpetually and relentlessly evolving. Obviously, getting a piece of that evolution could be life-changing. The problem is that Representative Offices (generally) cannot apply. Only Limited Liability firms can bid for government jobs.
5. It’s all about potential:
A Representative Office may be suitable for businesses looking to establish a short-term presence in China with no need to generate revenue, or for very limited sourcing ventures. However, China’s economy is a growth machine. If you see it playing even a small a role in your company’s future, then moving from a Representative office to the “mainland” could be a game changer.
The well-known headline benefits of Representative Offices are legitimate reasons to stay: limited commitment. Guarantees against a sudden change in tax policy. Light-touch bureaucracy. While these are appealing startup and short-term features, the longer-term potential in China remains a powerful draw.
If your Representative Office venture finds itself toiling with third parties and workarounds just to get a piece of the China business, maybe it’s time to move. There’s nothing to lose and everything to gain. The potential of China business – now and in the future – is colossal.
Your time to go “mainland”
Representative Offices are fantastic places to integrate into business life in China and offer a proven path towards establishing a business in the unique China landscape. They are by nature, however, limited in how they can expand and capitalize on initial success within this magnetic, kinetic economy.
Life beyond the Representative Office is full of freedom and opportunity. Perhaps 2019 is your year to hop to the “mainland” as a LLC?
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DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.