7 reasons a Limited Liability Company formation is the best onshore option in the Chinese mainland
Launching new businesses is a popular activity in China. According
(AIC) released on 14 January 2016, the number of companies in China
Officially all companies in China must register with the AIC - from small noodle restaurants to monolithic state-owned enterprises. The figures that really caught our attention were those about the rising number of companies in China, which is growing at a rate of 11.8% per year. On average during 2015 there has been an astonishing 12,000 new companies being registered each day in China. This equates to over 4 million new companies per year! The AIC defines small businesses as those with a registered capital of less than RMB 20 million. Of the approximately 12,000 companies which are currently being registered daily this year, it was reported that 96.62% fit this criterion.
A Limited Liability Company (LLC) structure in China looks the same as anywhere else: an independent legal entity owned by one or multiple shareholders. But there are plenty of good reasons why LLCs are so popular in this part of the world. The LLC structure allows companies and startups to trade directly with the local market in domestic China.
Setting up in the Chinese mainland - why choose an LLC?
If you are looking to get started and still considering different ways you might set up your new business, here are seven reasons why LLC company formation is the best onshore option in the Chinese mainland.
1. Limited liability protection:
Perhaps the main reason behind the popularity of LLCs in the Chinese mainland is that they offer companies and business owners complete personal protection from liability. Essentially, should anything go wrong, and the business gets into trouble, you are not personally liable as the owner or shareholder. In total, your liability is capped at the amount you have invested in the business. This protects you from liability for any bad debts or court injunctions incurred by the limited company - since it is regarded as a separate legal entity.
2. Low startup costs:
LLCs are also very attractive to first-time business owners, companies, small-medium sized companies, not least due to the low cost of setting up. As well as minimal application costs, starting at just RMB 20,000, there is also no requirement for paid upfront share capital. Instead the paid upfront share capital is considered as your working capital and is used to pay off initial start-up costs of the Company.
3. Great tax breaks:
When talking about different methods of company formation in China you must mention the tax environment that exists. Firstly, the upfront paid share capital (otherwise known as Registered Capital in China) is tax-free. In addition, LLCs in China are taxed at a fixed profits tax rate of 25% and there are preferential treatments provided depending on the sector, industry and service being offered in the market.
4. Range of permitted business activities:
Unlike some other company types, LLCs allow you to undertake a broad and extensive range of business activities. Entrepreneurs can apply for a license to trade in any of the 2,000 activities permitted by the Chinese Ministry of Commerce, from agriculture to finance. However, one does need to look at the “Negative List” as there are certain industries and sectors that are prohibited.
5. Set up anywhere in China:
As LLCs are permitted to trade directly with the local market you can take on office space and set up your business anywhere in the Chinese mainland.
6. Branch out:
Forming an LCC can be one of the most effective ways to gain a foothold and build momentum in China. Once your business is established, not only can you trade directly with the local market, but you can also open additional branch offices throughout the Chinese mainland to establish a greater presence across the region.
7. Set up with multiple shareholders:
LLCs are popular with businesses of all sizes as they allow for company formation with multiple shareholders. These shareholders can be either individuals, corporate entities or a combination of the two.
Setting up in the Chinese mainland – as easy as LLC
We have covered the benefits of setting up an LLC. But how do you go about doing it in practice?
The first thing you can begin the license application process by choosing your business activity – a company formation specialist can help you decide on the most suitable.
Next, you need to choose and reserve your company name. The company name must be written in the simplified Chinese language (i.e. simplified characters). The format of the company is:
ABC + Business Activity + (City of registration) + Company Limited.
Usually the Chinese name is between 2-4 characters long (the average being 3 characters). There are certain rules to follow in that names of cities, countries, lands, continents cannot be used. In addition, presidential or renowned people’s names, also, cannot be used. Ultimately anything which may be considered as taboo in China is not appropriate.
Once your name is registered, you are ready to apply for your license. To do this, you’ll need to provide the Ministry of Commerce (MOFCOM) and the Administration of Industry and Commerce (AIC) with certain documents, including your license application, memorandum of association detailing shareholder arrangements and ownership percentages among all partners, a certificate of incorporation (if one or more shareholders are corporates), the board resolution approving the LLC, and copies of shareholder passports and visas. Resolutions of Board of Director, Legal Representative, General Manager and Supervisor roles must also be provided.
Keeping it simple
It’s as simple as that. Once the documents have been submitted and your application has been reviewed, you’ll usually receive your license in a matter of months (approximately 8-10 weeks). All that’s left to do is open your corporate bank account and any additional trade-related licenses – a company formation specialist can help you with this step too – and you’re ready to start your operations anywhere in China.
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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.