With low manufacturing costs, ideal infrastructure, a motivated workforce and billions of potential customers in the area, China is an often coveted location to expand a business. However, many businesses feel overwhelmed by the thought of expanding to this market and dealing with foreign bureaucracies.
Many enterprises attempt to enter the local market by using the wrong business model. This may result in making investments that are unnecessary for the company or more expensive than it can afford.
These mistakes can easily be avoided.
Entering the Chinese market is easier than many people think – when you have the right help.
New Horizons Global Partners can assist you in determining your initial capital investment needs and with all aspects of setting up a company in China.
The amount of capital that is necessary to start a business in China varies tremendously and depends on a number of factors, including the type of business and infrastructure needs.
Our global experts can help you select the right business model that minimizes investments and maximizes your return on investment. In most scenarios, New Horizons Global Partners can help you enter the Chinese market quickly, with little investments and without having to deal with local bureaucracies.
Types of Business in China
In China, there may be several different types of businesses, including the following:
Wholly Foreign-Owned Enterprise
A wholly foreign-owned enterprise, or WFOE or WOFE, is a limited liability company. This type of entity is allowed to engage in profit-generating activities and hire local and foreign employees. This type of business is further divided into different categories including consulting, trading and manufacturing.
This business type requires various involved individuals, including an investor, director, supervisor and legal representative. Additionally, this type of entity must have a registered company address and you must establish the business scope.
There are generally three categories of foreign companies in China:
You must establish which type of business activity will be your primary business source. While Chinese legal authorities allow some deviation from this primary scope of work, a company would need to reapply for their WFOE if they change the focus of their company.
For companies that want to have a significant impact in China, the wholly foreign-owned enterprise is a popular option. Wholly foreign-owned enterprises realize many advantages over other business structures.
Some of the most important advantages include;
- Greater control over their intellectual property
- They can retain all of their profits
- They can legally transfer profits outside the country in US dollars
- They are not required to have a business relationship with an existing Chinese partner like some other business structures in China
- They can also provide customers with fapiao
WFOEs in China are required to pay tax and social insurance payments like most Chinese businesses.
A joint venture is a merger between a local and foreign entity. You can form a valuable partnership with an existing business in China.
There are several advantages to this option, such as being able to benefit from the business’ local contacts and expertise. Additionally, you can mitigate risk. The local and foreign entities split the profits and losses and co-manage the Chinese entity.
Establishing a joint venture may require you to draft several documents, including;
- a capital increase agreement
- shareholders’ agreement
- registration documents
A sales office rents a local location in China to conduct business. This option provides greater flexibility and does not require the registration of a separate legal entity. The headquarter company handles all expenses and invoices. An employer of record manages the legal aspects of the business and payroll.
This option is ideal for companies that want to expand to China with minimal legal, tax or human resources burdens. Having a sales office also helps launch a business in China faster than other options. The employer of record takes on the risk of having a local workforce.
A representative office allows a foreign business to hire staff in China through a distinct legal entity to represent the company. This option is used for businesses that want to promote their brand or products, perform market research, conduct marketing activities or conduct business meetings.
However, this option does not allow businesses to perform direct business activities in China. The parent company must perform those activities abroad. Additionally, the representative office cannot make local profits on behalf of its foreign parent company.
Companies can hire local staff through their own subsidiary. This business model blends harmoniously with using PEO services, which uses a local business to staff workers and handle administrative and payroll issues.
Capital Investment in Business
The investment that will be necessary depends largely on the type of business that will be opened.
There is no investment required for a sales office. The business owner only needs to be able to pay for the cost of their office space and their employees. Likewise, there is no investment required of a representative office. A joint venture’s required investment will be designated by the agreement between the two companies. A WFOE will require a capital investment.
New Horizons Global Partners helps with all aspects of company incorporation. We identify the best local company setup. We can assist with registering your business, advise you on compliance matters, and provide you with ongoing support and maintenance.
We work closely with local governments and tax offices and can impart valuable information to our clients. We also provide pre-incorporation PEO services if you want to expand your business into China before the registration process is complete.
Minimum Capital Requirements for a WFOE
The Chinese government has eliminated previous regulations on the amount of starting capital and registered capital needed for the WFOE incorporation for foreign investors.
This occurs because the government tries to motivate foreign businesses to set up in China and want to create a level playing field between local and foreign entities.
However, we advise foreign investors to declare a registered capital of at least 1,000,000 RMB when registering the WFOE (this amount is subject to the business activity and district for incorporation). Such an amount ensures a smoother process to obtain the certificate of registration.
It must be however noted that the declared capital doesn’t need to be injected into the WOFE upon registration or at once. This capital represents the amount of funds that the WOFE expects to generate in a period of 29 years.
The foreign business can use the registered capital to cover the operating costs of the newly established WFOE’s activities, as payment of the salaries, rental fees, product purchases, etc.
Local governments may tie a variety of things to a company’s minimum capital. For example, some local governments do not permit WFOEs that have low minimum capital to sponsor temporary residence permits who have their hukou in another city.
Additionally, the amount of registered capital may dictate how many foreign employees the WFOE is allowed to employ. Future branch offices may be denied if the registered capital is too low.
Calculating the registered capital for the WFOE can help the business better leverage its finances to acquire the support it needs and to avoid expensive problems in the future that are based on the company’s registered capital.
The registered is deposited into a Chinese bank. However, these funds are not frozen. The foreign business can use the funds to manage their business operations.
Therefore, it is important to have more in an investment than just the minimum required investment. This is simply the lowest amount possible you will need to initially fund your business.
Determining an Appropriate Amount of Capital to Invest in the Business
The minimum amount of capital investment the Chinese government requires should be different than the minimum amount of capital that your business really needs.
Foreign businesses need approval for their registered capital amount. Additionally, this amount can impact their tax liability. Businesses that receive funds as anything other than registered capital will be taxed on this amount.
Applying to have the registered capital increased may be an option, but it is often a time-consuming process. In addition to regulatory problems, miscalculating capital needs can place a business in a precarious position because it may not have sufficient funds to operate, which can result in the closure of the business.
It is important that businesses calculate their real needs for their initial investment. To determine an appropriate initial capital investment, it is important to seek professional services to provide counsel and guidance during the registration process.
Options for Determining Initial Capital Investment in China
The amount of capital investment that is necessary to set up a business also depends on who the business chooses to use to help with the registration process. Foreign businesses usually use one of the following options for determining the amount of their initial capital investment:
International Law Firm
Using an international law firm is the most expensive option for businesses. Setting up a WFOE with an international law firm may result in paying 100,000 RMB.
Large international law firms may provide competent and timely advice. They may have staff fluent in other languages and may act in a professional manner. Using this option is often safer because these professionals should know what they are doing. They may have participated in this process for many businesses over several decades.
The major disadvantage of this option is that businesses may have to pay much more to set up the business. Many smaller businesses or startups are not able to afford these hefty prices.
Additionally, experienced firms may have many clients at a time and may not be as communicative with business clients. They may not be updated about the progress of the process. For business owners, it is often difficult to delegate such an important task to someone else.
Local China Business Services Provider
Another option is to use a local China business services provider, such as New Horizons Global Partners, which specializes in providing business services to foreign companies.
These companies provide the same services as international law firms but at prices that are much more affordable for the average business. These providers can work with small companies, startups and global companies that are looking to expand into a new region.
Additionally, these types of businesses often have their own working relationships with international lawyers, so customers benefit from this connection without having to directly pay for their fees.
These providers rely on strong reputations in the local community and serve as experts. They provide hands-on representation and have experience with local government and tax agencies.
Setting up a WFOE in China with one of these firms may be about 10,000 to 20,000 RMB, but the specific capital investment depends on a number of factors.
A local China business services provider will know the requirements of your area. They know that it is critical to determine accurate figures related to capital investments and will work closely with clients to determine this budget. These providers also grant you peace of mind of knowing that you are working with a knowledgeable professional.
Sole Trading China Business Services Provider
In some situations, former staff members who worked at local mid-sized China business services providers may decide to open their own companies. They may offer rates at 10,000 RMB below so that they are lower than the traditional market rate for these services.
However, using one of these services is a tremendous risk. The former worker may not have the same expertise as the business leader and may not know how to operate their own business.
They may make mistakes in the incorporation process, which may cost the business valuable time and money. These mistakes can also negatively impact the relationship between business and local government authorities. They may not be able to effectively manage their time and may not be able to provide personalized attention to every client.
Because many startups do not have a lot of capital, they may try to cut corners by performing much of the work themselves. There is nothing in Chinese law that prohibits a company from handling the registration process itself.
This option is more affordable and may cost 10,000 RMB or less. However, the risk is very high.
Foreign business owners may not be familiar with the various regulations and laws regarding the operation of a business in China. They may break the law unknowingly, which may subject them to substantial liability. They may not speak the language and may not be able to speak with local government officials. They may not know what documents to submit or where to submit them. They will have to negotiate all of their own contracts with vendors and employees.
Performing the registration process yourself may cause many unintended consequences. Your reputation may suffer with local government authorities.
The launch of your business may be delayed because you failed to complete a necessary step along the way. You may have to pay extra costs to re-apply or re-submit the information.
Contact New Horizons Global Partners for Assisting Setting Up Your Company
Chinese laws regarding minimum capital requirements and the registration of WFOEs and other business entities are complex. New Horizons Global Partners can assist you with the process of setting up your business with the appropriate amount of capital investment.
We will explore all options with you so that you are aware of the various ways that you can establish your business with minimal capital investment. We also provide PEO in China to help you launch your business expansion immediately.
Once your WFOE is registered, you will likely have additional needs to tend to prior to operating your business, such as establishing an accounting system, acquiring work permits for foreign staff and registering intellectual property.
We provide trusted local experts who can help set up your foreign business in an affordable, efficient and compliant manner. Contact us today to learn how we can help.