Your top 10 check list to set up a company in China
Companies looking to establish a new business subsidiary in China
have two options on location – some choose to start their company in
one of the country’s free trade zones to take advantage of the many
tax, duty and repatriation benefits. Others meanwhile opt to set up a
company in onshore China. Which is your best option? If you are
looking to trade directly with the Chinese local market, undertake a
broad range of business activities or take on government work then
the mainland option may just be the right one for your business.
Checklist – setting up a company in the Chinese mainland
While the process to set up a company in China is not as complicated as you might think, it is not without its complexities. Below you’ll find the definitive 10-point checklist to help you get your China business up and running.
1. Choose your business activity:
The first thing to decide before you set up a company in China is the industry in which you will trade. There are thousands of permitted business activities which include trading, agriculture, hospitality and manufacturing. However, one must keep in mind of the “Negative List”. The “Negative List” lists out industries, fields and businesses from which investments are barred or limited. Market access for foreign investors, therefore, can have equal access as local Chinese investors to industries, fields and businesses that are NOT on the list. Governments at all levels will be responsible for enforcement. In terms of the degree of enforcement, the lists can fall into two categories of prohibited entry and limited entry, both applying to initial and expanded investments, mergers, and other market entry behaviors by any voluntary market participants. For the prohibited entry list, market players will not be approved to get access to such industries by the administrative authority, whereas, for limited entry, market players will have to apply for access, which will then be assessed by the authority, and then meet the requirements laid out by the government. Below are a few examples of some standard business scopes:
Wholesale of XXX Product; commissioned distribution (excluding auctions); import and export; and other related services. (Related to administrative permit for operation)
Wholesale of XXX Product; internet retail of XXX, commissioned distribution (excluding auctions); import and export; and other related services. (Related to administrative permit for operation)
Development, manufacturing and processing of XXX products as well as related XXX, sales of self-manufactured products; import and export trading, wholesale and commission agency business (auction excluded) of the aforesaid goods, and provision of after-sales services and other related services.
Investment Consulting, Enterprise Management Consulting, Enterprise Planning Consulting (Excluding Advertising), Trade Information Consulting, Environmental Information Consulting, Economic Information Consulting, Scientific and Technical Consulting. (Related to administrative licensing with license management)
2. Find your ideal location:
Once you’ve decided your business activity, the next step is to decide where you wish to locate. The right location for you will depend on many factors such as your budget, chosen business activity, suppliers and customers. Should your company rely heavily on imports and exports, for example, then setting up near one of China’s free trade zones or ports – would make sense. You are also not limited to one location – meaning that branches can be established - and you can build a large local presence over time.
3. Finding office space:
Once you have chosen your ideal location, it’s time to start hunting for office space. In China, there are a few common types available. Serviced offices are usually owned and maintained by a third party and contain everything you need to move in right away – desks, phone and internet access, reception cover. Your lease payment would usually cover rent, use of office equipment and utility bills. Shell and core are at the other end of the scale – they require full fitting and decoration, with bills on top of the rent. Somewhere in the middle are sublets which usually don’t require any fitting or decoration, but you may have to provide your own office equipment and take care of the bills separately from the lease.
4. Determine the legal structure that fits your business activity:
From a legal standpoint, there are several types of business structures that can be set up by foreign investors in China – the most common being a Limited Liability Company, or LLC. A LLC is an independent legal entity owned by one or more shareholders. A business wishing to trade under a commercial or industrial license (including trading, ecommerce, industrial and manufacturing activities) must form one to set up a company in China.
5. Choosing a local service agent:
Foreign investors can only set up a company in China by partnering with a local service agent. A corporate service provider or law firm should have the ability to act as a local service agent. It is important to check their business license to verify that this is possible otherwise you may be paying for additional fees during the incorporation phase of your company incorporation process.
6. Naming your company:
Choosing a company name that sticks in the memory and conveys your brand values is not easy anywhere in the world. And in China, there are even more considerations to keep in mind. In summary: the company name is registered in the Chinese language (simplified or traditional versions – 2 to 4 characters long), offensive language is forbidden, company names cannot contain religious references, or indeed references to any known organizations (anything from ‘FBI’ to ‘Mafia’). In addition, they cannot include the names of countries, regions, cities, etc.
7. Getting your paperwork in order:
When you first approach the Ministry of Commerce and Administration of Industry and Commerce to reserve your chosen business name and apply for your business license, you then provide them with documents that will include: your online application form; articles of association detailing shareholder arrangements and ownership percentage among all partners; a certificate of incorporation (if one or more shareholders are corporates) which must be notarized by the Chinese consulate or China-designated notary; the board resolution approving the LLC (if applicable); and copies of shareholder passports and appointed individuals for the China organization. A Bank Reference Letter will also be needed detailing the bank balances to verify that the investment promised can be made.
8. Applying for visas:
Another major plus point to setting up in China is that it allows business owners to apply for multiple visas for the foreign employees as well as their own – in fact, there is no upper limit. Having said that, there is one caveat: the visa applications must make sense and must be reasonable against the actual functions the individuals will be performing within the company. In most locations if local individuals can handle the responsibilities of the position, the immigration authorities will question the reasoning of hiring / seconding the foreigner.
9. Owning shares in your company:
There are two primary ways to own shares in your China company – in your personal name or through a company. While both are feasible, owning your shares through a company is often the more sensible option. For one, if you own your shares in an overseas company, you’ll have a clear legal framework to ensure all shareholders are protected should any issues arise. Plus, overseas companies allow foreign investors to repatriate funds away from China.
10. Partnering with a market-entry adviser:
Setting up a business anywhere can be a challenge; setting up overseas more challenging still – particularly in China with its nuanced legal and company formation process. While you absolutely can choose to go it alone (without any advisory), you may find working with a consultant with local knowledge not only ensures that you complete all the necessary steps correctly.
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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