China is one of the fastest-growing economies. It attracts businesses from across the world to benefit from its flourishing market conditions. However, to start a business in China, a company must first decide on its business structure.
A foreign company can enter the Chinese markets via three modes: Wholly Foreign-Owned Enterprise (WFOE), starting a Representative Office (RO), or PEO services. Making the right choice between the available options require the business to assess various aspects. It also includes assessing the operational control, capital needs, and entry barriers on the different business forms.
Wholly Foreign-Owned Enterprise (WFOE) in China
A Wholly Foreign-Owned Enterprise or WFOE is a form of business in China that is owned and operated entirely by foreign companies. A Wholly Foreign-Owned Enterprise in China is registered in the form of a Limited Liability Company (LLC). The foreign entity is wholly liable for its operations and compliance in the country.
By opting for WFOE registration in China, the foreign company can avoid partnering with a Chinese partner. It also gets the full authority to make its business decisions and operate without depending upon a local partner. With a WFOE, the foreign company can hire Chinese individuals, buy real estate, get IP rights, issue bills in its name, enter into contracts, and raise funds from local investors.
Minimum Capital Requirement for WFOE Registration
The Chinese government is making numerous efforts to simplify the regulations and entry requirements for foreign companies. One such endeavor is the recent removal of the minimum capital requirement for WFOE registration in China.
Now, a foreign company does not need to invest a fixed amount of upfront capital for starting a WFOE. It can only launch its activities by infusing the necessary capital to fulfill its basic incorporation requirements. The company can also inject its capital over a long period of 29 years. It can start with the essential infusion to meet its local registration needs, tax registration, licensing, and IP registration. The company will also need initial capital to hire employees, advertise its brand, and commence its operations in China.
Setting up a Representative Office in China
An international parent company can also enter the Chinese market via its Representative Office. A representative office in China can be opened to perform only the company’s essential functions. It includes market research, advertising, customer support services, and product study. A representative office of a foreign company in China cannot operate as a separate entity. Thus, the functions of this kind of business structure are limited.
The parent company must have a two-year industry continuous experience under any country’s jurisdiction. Also, it cannot perform any profit-earning, manufacturing, trading, or consulting activities. It cannot employ Chinese individuals as employees and also needs to obtain immigration permits for its foreign employees.
Capital Requirement for Representative Office
To set up a representative office in China, a foreign company requires only primary capital for its essential operations. It does not need any upfront capital and requires capital only to pay for its office premises, employee’s salaries, marketing activities, and other utility bills.
Opting for the services of a PEO is a much affordable and hassle-free manner to start a business in China. A Professional Employment Organization provides a variety of services to companies for their foreign market entry and employment management.
PEOs are a preferred tool of global expansion for small to medium companies and young startups that are expanding to a foreign market for the first time. To start a business in China without the need for a local legal entity, a company can opt for PEO services.
With a PEO, the company can transfer its liabilities and responsibilities of hiring local employees, complying with local laws, and executing international contracts. The company can also skip the complicated Chinese labor laws and regulatory requirements by delegating them to a PEO.
This way, a PEO acts as a straightforward route for a global market fresher to leverage the growing market of countries like China. It can assist the company with its employment management while the company focuses on its expansion strategy.
A PEO is formed by a team of industry experts who can assist a company with its employee recruitment and administration, payroll processing, and business incorporation. It can also help with market research, contract management, visa and immigration, local law compliance, tax management, benefits management, and terminations.
Benefits of Choosing a PEO Services
The features of a PEO can be summarized as the following benefits it provides to a global expansion aspirant:
- It can guide the business on Chinese laws and help the company stay compliant with the local compliance norms.
- It also saves time and costs of setting up a business in China by eliminating the need to set up a local entity.
- A PEO can hire, manage, retain, and terminate employees on the company’s behalf.
- A PEO can take care of the pre-entry market study and market entry strategy implementation.
- The company retains full control over its employees and market entry decisions.
- The company can save significantly on the taxes associated with setting up a business in China.
New Horizons Global Partners acts as the one-stop-solution for foreign businesses for all their expansion requirements. International companies can easily set up their business in China without worrying about their local compliance and hiring needs. We can also handle the entire procedure of contract drafting and execution, compliance with local wage norms, and taxation.
When deciding between a Wholly Foreign-Owned Enterprise (WFOE), starting a Representative Office (RO), or PEO services, the company must assess its objectives, investment, and long-term goals.
A WFOE is the best choice for a large company with a defined expansion strategy and knows its expansion goals. A sizeable foreign company that wishes to set up a business can choose PEO without worrying about the time and costs associated with its registration. However, when a company only wants to study the Chinese market or set up a vendor network, it must opt for a representative office. This way, it can start small without infusing a large sum of capital.