With China ceaselessly increasing its tax crackdown on foreign companies operating improperly in China without a China entity (WFOE, Joint Venture or Rep Office), forming a China entity and starting a business in China is very much in vogue right now.
Starting a business in China usually involves forming a Wholly Foreign Owned Entity or WFOE. Forming and getting a China WFOE up and running involves more than simply securing Chinese government approval for the new entity. It also usually implicates the following eleven issues as well.
1. Determining whether a China entity is required at all. Forming a China WFOE is expensive and time consuming, but owning and operating one is even more expensive and time consuming. Our China lawyers are of the view that no WFOE should be formed unless truly necessary. Therefore, the very first thing we do when retained on a China WFOE formation is to work with the client to determine whether a WFOE is truly necessary. For more on this, check out How To Manufacture In AND Sell to China Without a WFOE.
2. Determining whether to form a Joint Venture or a Rep Office instead of a WFOE. There are still many industries in China in which a WFOE is still not allowed, whereas a joint venture is. And sometimes, though rarely, a Representative Office (a/k/a Rep Office) makes sense.
3. Determining whether it makes sense to form a Hong Kong company to own the China WFOE. Forming a Hong Kong company to own a China entity makes sense more often than not, but it certainly depends on the specific situation. For more on whether it makes sense to use a Hong Kong parent company, check out How To Form A China WFOE: Hong Kong Parent Company Is Optional.
4. Ensuring the WFOE’s scope will both allow formation of the WFOE and not hamstring it in the future. If the scope is too narrow, the company cannot do all it wants to do in China. If the scope is too broad, WFOE formation will be denied. It truly is a Goldilocks situation. For more on this, check out Badly Formed China WFOEs are Dangerous.
5. Finagling the appropriate amount of minimum capital. Speaking of a Goldilocks situation, our company formation lawyers also work with our clients to determine the appropriate amount of capital for their WFOEs and then with the Chinese government on that same issue. For more on this, check out How To Start A Business In China. China WFOE Minimum Capital Requirements: The Goldilocks Rule.
6. Ensuring the lease is suitable for a China WFOE. If the lease is not suitable, no China company can be formed. The lease is one of the first things on which our WFOE formation lawyers focus.
7. Ensuring the business location makes sense. With an office, this is usually relatively easy, but with something like a retail establishment, it can be a big issue. You typically do not want your official business location to be the same as your initial retail location because if you end up wanting to close down your initial retail location, you will then have to deal with the added hassle of needing to secure approvals from the Chinese bureaucracy to change your business location. There are also all sorts of issues that can arise from having a location in one place and your employees in another.
8. Preparing Chinese-language employment documents for all employees. This includes mandatory documents such as labor contracts and company rules and regulations, as well as optional documents such as confidentiality agreements, non-compete agreements, and educational reimbursement agreements.
9. Ensuring your IP is protected in China. This typically begins with figuring out what can and should be done to protect trade secrets, trademarks, copyrights, and patents, and then drafting appropriate contracts and provisions with vendors, suppliers, counter-parties, and employees to protect that IP. This also usually involves figuring out what IP can and should register in China as a trademark, copyright, or patent. For more on China IP protection, check out The Four Best Ways to Protect Your IP from China.
10. Opening a China bank account and retaining a China accountant and a China bookkeeper. China WFOEs need China-savvy accountants early on to determine your appropriate capital requirements for the China WFOE and oftentimes to deal with any transfer pricing issues as well. After that, a good accountant is necessary for tax and other accounting issues. And just like in the United States, Canada, and England, you almost always will find the best accountants at an accounting firm, and pretty much nowhere else.
11. Ensuring your China compliance house is in order. This includes setting up a China compliance program to protect against potential China and U.S. anti-corruption problems. Compliance is of particular concern to SMEs, who typically name the parent company’s CEO as the WFOE’s legal representative, and thereby expose the CEO to criminal liability in China for employees’ misdeeds. For more on China compliance, check out China Compliance: A Basic Checklist.
If you get all of your ducks in a row on these eleven issues, you will be on your way to starting a successful business in China.