Doing Business in China by Starting a Business in China: The Legal Basics.

China legal basics

One of the most common calls our China lawyers get is the one from someone saying they want to “start a business in China.” The first thing we do with that sort of caller is to seek to ascertain whether a China business is actually necessary. Forming and then operating a business entity in China is not fast, easy, or cheap. So whenever possible, we seek to determine whether there is some way the caller can conduct business with China and achieve what it is seeking to do with China, while not having a business in China at all.  For potential alternatives to forming a China business, check out the following:

But if forming a China business does make sense, the next issue is what kind of business makes sense. On this, you typically have three choices: a Wholly Foreign Owned Entity (WFOE), a Joint Venture (JV), or a Representative Office.  These days, the overwhelming majority of foreign companies seeking to do business in China go in as a WFOE, but there are definitely still instances when a Joint Venture or a Representative Office make sense.  or more on the differences between these three sorts of entities and on what it takes to form each of them, check out the following:

If you are going to have a China business entity, you are going to have employees (indirectly in the case of a Rep Office). That means you are going to need written employee contracts (these must be in both Chinese and in English or whatever additional language you choose) and a written employee manual/employee handbook (again, in Chinese and in English). You probably will want your employee agreements to speak to issues like trade secrets and non-competes (which are limited in China) and overtime.  For more on employee contracts and employee handbooks, check out the following:

The last thing you need to focus on if you are going to be doing business with China, particularly if you are going to be doing business in China, is protecting your intellectual property. This almost always means registering your brand name as a trademark in China and oftentimes your logo or slogan as well. This also means registering your patents or copyrights in China as well. For more on registering your trademarks in China and protecting your IP there, check out the following:

The above are the four main issues confronting foreign companies seeking to do business in China:

1. Determine if a China company is necessary.

2. If a China entity is necessary, form the right one.

3. If you are going to have a Chinese company, you should have the proper employment contracts and employee manual.

4. If you are going to be doing business in China, you are going to need to take certain steps to protect your IP.

That was easy, wasn’t it? Now go forth and prosper.

6 responses to “Doing Business in China by Starting a Business in China: The Legal Basics.”

  1. Good points, Dan.
    One thing more…you said: For potential alternatives to forming a China business, check out the following: 
        Getting Your Product Into China Via Distributorship. A Legal Piece Of Cake.
        Eight Tips For Your China Licensing Agreement.
        Selling Your Product Into China. What You Need To Know.
    END QUOTE
    It’s also interesting to consider how U.S. ecommerce merchants are penetrating China’s consumer market via internet: http://learnchinesebusiness.com/2012/05/30/reaching-chinas-internet-shoppers/
    Not completely certain of the legal barriers or other negatives to taking this alternative  route, but it’s essentially a way into China without ever “going there.”
    Again, this is a nascent venture into the unknown, and still unclear on many levels—both ways actually, and not to digress, but one American who just bought some items from a Chinese ecommerce site, reported that he was sent a letter by U.S. Customs asking about the transaction–no specifics on why either…was it a concern with duties, intellectual property theft (by the Chinese manufacturer), etc., who knows?—but the same sticky issues may exist for ecommerce merchants sending goods to China, and the Chinese consumers receiving them. However, there are already strong partnership shipping solutions established to aggressively handle such complexities, so U.S. merchants are less likely to get bogged down in the details.

  2. Good points, Dan.
    One thing more…you said: For potential alternatives to forming a China business, check out the following: 
        Getting Your Product Into China Via Distributorship. A Legal Piece Of Cake.
        Eight Tips For Your China Licensing Agreement.
        Selling Your Product Into China. What You Need To Know.
    END QUOTE
    It’s also interesting to consider how U.S. ecommerce merchants are penetrating China’s consumer market via internet: http://learnchinesebusiness.com/2012/05/30/reaching-chinas-internet-shoppers/
    Not completely certain of the legal barriers or other negatives to taking this alternative  route, but it’s essentially a way into China without ever “going there.”
    Again, this is a nascent venture into the unknown, and still unclear on many levels—both ways actually, and not to digress, but one American who just bought some items from a Chinese ecommerce site, reported that he was sent a letter by U.S. Customs asking about the transaction–no specifics on why either…was it a concern with duties, intellectual property theft (by the Chinese manufacturer), etc., who knows?—but the same sticky issues may exist for ecommerce merchants sending goods to China, and the Chinese consumers receiving them. However, there are already strong partnership shipping solutions established to aggressively handle such complexities, so U.S. merchants are less likely to get bogged down in the details.

  3. It seems that individual investors opt for
    Representative Office (R.O.) mainly because of the constraints of their
    budgets. Though the registration fees and the optional service charges (by an
    agent) for a R.O. are more or less the same as those for a WFOE, I personally
    do not recommend R.O. for business lines of tangible goods, as R.O. cannot
    apply for or issue Fa Piao.
     
    Some individual investors appear to
    deliberately circumvent the red tape by concealing their business activities of
    offering profit-making services (consulting, translation or agency etc.)
    through their R.O., especially when their clients do not request for Fa Piao. Though
    such business operation is, by law, not legal, it is hard to enforce the
    inspection or trace the origin of service delivery, as services by nature are intangible.
    And the authorities usually devote their capacity and resources to monitoring
    R.O.s set up by large companies and banks.

  4. It seems that individual investors opt for
    Representative Office (R.O.) mainly because of the constraints of their
    budgets. Though the registration fees and the optional service charges (by an
    agent) for a R.O. are more or less the same as those for a WFOE, I personally
    do not recommend R.O. for business lines of tangible goods, as R.O. cannot
    apply for or issue Fa Piao.
     
    Some individual investors appear to
    deliberately circumvent the red tape by concealing their business activities of
    offering profit-making services (consulting, translation or agency etc.)
    through their R.O., especially when their clients do not request for Fa Piao. Though
    such business operation is, by law, not legal, it is hard to enforce the
    inspection or trace the origin of service delivery, as services by nature are intangible.
    And the authorities usually devote their capacity and resources to monitoring
    R.O.s set up by large companies and banks.

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