According to McKinsey, China added, “the equivalent of the entire Australian economy to its GDP” in 2019 alone. China is also making a concerted effort to open up its economy to foreign players, who are estimated to gain 10-20% of the Chinese market in 2020. Given these statistics, it’s no wonder that so many foreigners are interested in starting a business in China.
But foreigners need to do their research before renting out office space. Starting a business in China is different than it is in, say, the United States. You’ll find that the government has more involvement in the business world—and there may be a little more paperwork.
Even though you may have to jump through a few more hoops, you’ll find that China is one of the most fast-paced and rewarding business environments in the world.
Read on to discover the 9 steps to starting a business in China as a foreigner, from picking a location to hiring your first employees.
Pick a Business Location
Before starting a business in China, you’ll have to decide where you want your business to be located. China is a large, growing country, and new business hubs are still emerging. However, you may want to focus on cities that are already bustling business centers, like Shanghai, Beijing, Guangzhou (formerly Canton).
Shanghai is a popular choice because of its special perks. The government actually encourages foreign business and innovation. For example, Shanghai’s 120 square kilometer Free Trade Zone (FTZ) allows many foreign businesses to operate without paying as many taxes as usual. Fewer industries are restricted from foreign investment. The government relaxes some administrative controls that are present in other cities. Office rental is easier and is of higher quality than it might be in less established cities.
While Shanghai might be a good location for most foreign enterprises, your ultimate decision depends on your specific business needs. Before making your final decision, consider key factors like:
- Talent pools
- Proximity to business partners
- Logistical needs (ports, etc.)
- Local government regulations
Don’t discount local culture, either. When you’re starting a business in China, a welcoming environment, like that in Shanghai, can mean the difference between a successful venture and a flop.
Use a PEO – Employer of Record
Before choosing a legal structure for your new business, consider alternatives. Because of strict Chinese government policies, starting a business in China as a foreigner can consume a lot of time and money. If you choose to incorporate your business with an official legal structure, the process could take months.
If you choose to start your business in China with help from a local Professional Employment Organization (PEO) / Employer of Record (EOR), like New Horizons Global Partners, you can start operating in days.
New Horizons’ PEO services in China help foreign companies without local entities or interests directly hire local Chinese talent. They act as the local employees’ Employer of Record, simplifying your company’s workforce management. They even absorb all local employment liabilities, empowering you to conduct business in China without risk of employee-related penalty.
Benefits of New Horizons’ PEO Solution in China:
- Allows you to conduct your business from abroad, without creating a company in China
- Empowers you to start operations in China in days instead of months
- Handles top-talent recruitment and hiring processes
- Manages your employees and all consequent responsibilities
New Horizons’ PEO services are especially appealing for businesses that want to conduct market research or test a product without setting up a separate legal entity, need to scale up or down regularly, or want to be the first to market a new product or service. Regardless of your situation, help from New Horizons’ PEO service is worth considering—especially if you want to jump into the Chinese market and begin producing revenue right away.
Related: PEO & Employer of Record Solution in China
Use a Recruitment Agency to Hire Chinese Staff
When starting a business in China, it’s generally recommended to hire Chinese staff instead of foreign staff. Chinese employees will know the local market better. They may even be able to provide insights that improve your products or services. Chinese staff is absolutely critical for navigating the cultural differences that you might not expect.
However, talented Chinese employees are always in demand, especially in the current job market. It can be hard to secure the best talent since they’re constantly approached by businesses with enticing job offers.
For foreigners starting a business in China, it often makes more sense to use a recruitment agency in China like New Horizons to identify and secure top local talent. New Horizons’ staffing team can:
- Create search strategies and job descriptions
- Find the best local professionals
- Interview candidates for a short-list
- Recommend hiring decisions
- Handle all administrative and legal duties that come with the hiring process
- Provide employee retention consulting
- Manage employee payroll and other benefits
Having local staff from the start can be a game-changer for your brand—and using New Horizons’ local staffing agency is the best way to secure a top-notch Chinese staff for your business quickly.
Choose a Legal Structure
If you decide to forgo a PEO and incorporate your business, choosing a legal structure is the first step. There are a lot of different business structures to choose from when you’re starting a business in China, but only one, the WFOE, allows for the flexibility you’ll need. Once you’ve decided on a legal structure, you’ll face a few more considerations, like deciding on minimum registered capital.
Wholly Foreign-Owned Enterprises
A Wholly Foreign-Owned Enterprise (WFOE) is a business established by foreign parties without direct involvement from a Chinese investor. WFOEs can engage in profit-making activities across China, and hire both local and foreign employees. Because of these flexible capabilities that limit the need for third-party operators (distributors, importers, factories, etc.), WFOEs are the most popular legal structure for foreign companies.
Related: Company Registration in China
Minimum Registered Capital
Once you choose a legal structure, you’ll need to determine the minimum registered capital. The registered capital is the total amount of capital contributions that must be paid by shareholders to a foreign-invested enterprise registered with the Chinese government. Technically, the Chinese government has eliminated this requirement for most WFOEs, which was always the only legal structure required to pay the minimum registered capital amount. This means that now the only required upfront costs are those for the actual registration. However, it may still make sense to declare capital anyway.
Declaring a capital amount of at least 1,000,000 RMB can:
- Help streamline the business registration process
- Open up governmental benefits, like temporary residence sponsorships and increased foreign employee allotments
- Cover initial operating costs, like salaries, rental fees, resource purchases, etc.
- Assist with the solidification of your legal structure
Declaring this amount does not mean that you have to pay it into the company all at once. Rather, this is a statement of the amount of funds that is planned to be generated by the WFOE within a fixed period of 29 years. That capital will then be used to pay for expenses like office rental, salaries, and equipment costs, for example.
Before starting a business in China with official incorporation, you’ll want to review all of the available legal structures with a lawyer to determine which best fits your needs. It is also a good idea to hire an accounting agency with China-specific expertise. Financial compliance during the company incorporation process is critical, and an accountant can help you each step of the way. Throughout the process of choosing your legal structure, it may also make sense to partner with a consultant to see whether you should register minimum capital—and how much to register.
Create Your Business Plan
In most countries, it is useful to create a detailed business plan. When you’re starting a business in China, a thorough business plan is critical. Besides a description of your industry and product or services, your business plan should include:
- Business location
- Projected revenue
- Expected number of employees
- Budget requirements
This is a good time to plan your employment process and operational workflow, too. Review employment regulations with your Chinese lawyer and your consulting partner. You might also consider employment consulting from New Horizons’ local experts, who can help you lay the groundwork for a thriving office culture—and even jumpstart hiring in later stages.
Once completed, your business plan will be approved by the government. You’ll have to stick to the guidelines you’ve written down—or risk fines or other punishments by the Chinese government.
Considering this restriction, you’ll want to create a business plan that is not so broad that it will be denied. However, your plan should not be so specific that it will tie up your business if you want to expand later.
Open a Bank Account
Opening a bank account is a necessity, especially if your business is registered as a WFOE. If your business isn’t incorporated, you can open a few different kinds of non-resident accounts like a bank account for foreigners.
Setting up a bank account can be difficult. The details you need to provide will differ from city to city, so consider calling ahead before heading in to set up an account. However, some requirements are constant. When going to set up your bank account, you can expect to provide:
- Business registration proof, such as a valid business license, enterprise code certificate, tax registration certificate, or articles of association
- A list of directors’ names
- A company chop (a seal or stamp)
- Valid ID for legal representatives of the company (responsible officers, directors, and principal shareholders)
- Company structure and ownership details
- Recorded state approval for your business venture
Popular bank choices include Hang Seng Bank, ICBC, Bank of China. You can even choose a bank that’s familiar to you. Many foreign banks have a Chinese presence. For example, companies like HSBC, Citibank, Standard Chartered, and Bank of America have a big presence in China and are trusted by foreign and Chinese business people alike. If you already have an account in one of these banks, they may allow you to transfer it to a Chinese branch.
Given the difficulty of opening a bank account as a foreigner in China, you may want to get help from New Horizons’ consulting team. Ultimately, having a local bank account simplifies the process of doing business in China. With a reliable bank account, you’ll have much more transparency into your day-to-day business dealings. (And starting a business in China will be that much easier.)
Related: How to open a bank account in China
Work with a Market Entry Consulting Agency
The Chinese market is rewarding—but it’s highly complex, especially for a foreigner.
No matter whether you choose to use PEO services to manage your Chinese business or incorporate your company with one of the official legal structures, you’ll want to get help from New Horizons’ market consulting services to help you develop a strategic market entry plan for starting a business in China.
As a consulting partner, New Horizons has ample experience helping foreigners start their businesses in China. The consulting team already knows about local regulations and industries and can help your business navigate cultural differences, too. New Horizons’ consulting team can help you:
- Assess the current market
- Craft a market-entry strategy
- Create a long-term business plan
- Determine a procurement strategy
- Conduct consumer and customer surveys
As a top-tier consulting partner, New Horizons knows everything about starting a business in China and doing business in the local area you choose, like who the local talent is, where to buy a resource for the least inexpensive price, and how to approach a business deal.
Related: Market Research in China
Protect Your Intellectual Property
First-time foreign investors are particularly wary of intellectual property (IP) theft in China. But as long as you take preventative steps, you can protect your most valuable intellectual assets when starting a business in China. Before completing any other paperwork, be sure to:
Register Your Trademark
China doesn’t recognize trademarks filed in another country. In fact, it’s a first-to-file country, meaning that the first person to file the trademark gets it legally. After ensuring that your trademark is currently available, you’ll need to register trademarks immediately and register any patents in Chinese. If your application is denied, you can still appeal. The government recognizes:
- Logos and symbols that distinguish particular goods or services as belonging to your brand
- Words, designs, letters, numbers, or 3D symbols that are unique and are associated with your business
- Combinations of colors that denote association with your business, good, or service
Related: How to Protect Intellectual Property Rights in China
Watch Chinese Trademark Filings
China’s trademark office regularly publishes trademark applications so that businesses can oppose trademarks that are too similar to their own. Monitor these filings and oppose fraudulent marks before they are approved.
Work with Chinese Customs
If you register your trademarks and design patents with Chinese Customs, they can stop the import and export of counterfeit products. If you already know of any offending manufacturers and their locations, that will help Chinese Customs officials catch the culprits.
Request Takedowns on Chinese Webpages
After registering your IP, you can petition Chinese websites like Alibaba, Taobao, and Baidu to take down infringing products. With the right paperwork, this process takes about a week. As long as you take preventative steps when starting a business in China, you can keep your intellectual property safe.
Turn In Any Remaining Paperwork
At this point in the process of starting a business in China, you’ve already chosen your legal structure, written a business plan, hired employees, and filed your trademarks and patents. Now, it’s time to turn in any remaining paperwork.
New Horizons’ consulting team will be particularly useful throughout this final step. They can help you determine:
- Which local applications you might have missed
- What you need for final approval from government officials
- When you can estimate paperwork completion
Turning in your paperwork may come with a few surprises. Depending on where you are, a local authority might want to see a physical example of your product or view your facilities. To prevent delays, allot more time than you think you’ll need during this stage of starting a business in China. (Or work with a PEO like New Horizons in the first place.)
Conclusion
Starting a business in China can be a complex process, but with the help of a little research and New Horizons Global Partners, you’ll be able to quickly start enjoying the financial gains of doing business in China.
Interested in starting a business in China as a foreigner? We can help.