There are some excellent international company formation companies and there are some where you are all but guaranteed to waste your money. Some of these company formation firms (truly, always the better ones) call my law firm for assistance when they are facing a new or unusual or difficult legal situation. Sometimes a foreign company using a company formation company will call in our team of China business lawyers to assist when they become worried about their chances for WFOE formation success. Other times, we get called in to deal with the more legalistic aspects of a formation.
I mention all this because I recently was cc’ed on an email to a client experiencing difficulties with forming its China WFOE. This email provides a pretty good example of the typical issues involved in forming a WFOE and, stripped of any identifiers, it reads as follows:
At this point, I will need to review the following:
- Application for reservation of name;
- Feasibility Report together with supporting financial statements;
- Most recent proposed Articles of Association.
These three documents have to match, so review of all three at the same time is necessary.
With respect to your questions, let me know how you want to proceed. Do you want to provide me with a list of questions or do you want to schedule a conference call?
In terms of reviewing the application process, please let me know how you want me to proceed. I will need to know where you are in the process and what documents have already been prepared.
Usually I find that most clients have questions/problems with the following:
- Proof of existence of the U.S. shareholder. Appropriate documents must be authenticated by both the California Secretary of State and the Chinese consulate in San Francisco.
- Appropriate lease for the WFOE in China. In particular, for trading companies, the Shanghai authorities frequently insist on a warehouse space that can be quite expensive and possibly unnecessary.
- Registered capital. Shanghai generally insists on at least $150,000 in registered capital. For trading companies, certain districts insist on even more. The actual amount of registered capital depends on how the total investment is explained in the feasibility report. For this reason, the actual required registered capital may be substantially higher than the local minimum.
- Management structure: Board of directors or managing director. Who is the general manager and what will be its duties? Who acts as supervisor?
For trading companies, Shanghai usually imposes two additional requirements:
a. Audit of previous year’s performance for the shareholder. Closely held companies frequently do not have an appropriate audit report.
b. Listing of customs commodity codes for any product to be imported or exported.
Employment is a separate issue not directly part of the company formation process. However, your WFOE will directly employ Chinese nationals. Since this process is quite different than the indirect employment you have been using for your Rep Office, your rep office experience is not likely to be transferable to your situation as a WFOE. A major issue in the employment area is protection of intellectual property and trade secrets with respect to employees. The employment issues should be considered now, so that you are ready to proceed when the WFOE is approved.
Let me know how you want to move forward on this project. I look forward to hearing from you soon.
Our law firm has never once had a WFOE application rejected in China and though past performance is no guarantee of future success, our past performance is based in large measure on how we work with the appropriate Chinese authorities before our clients get locked into something that may lead to a rejection of their WFOE application. Sometimes we have to go to the authorities multiple times to test out “ideas” before we actually submit anything. These idea testing conversations are done without our naming the company we represent that is seeking to register a WFOE. Once the Chinese government rejects a WFOE application — for any reason — the chance of the company ever securing approval goes way down.
Be careful out there.