I spoke with a Spanish company last week that is interested in hiring people in China to oversee quality control and help in selling its products there as well. This company asked me to set out the basics on what our China corporate lawyers could do to help them get started in China. I just wrote the email and figuring I might as well kill two birds with one stone, I have modified it slightly for this post.
This is to follow up on our recent telephone conversation on what it will take for your company to be able to hire employees in China and the additional actions you should take to operate legally in China and to protect your company there.
1. To hire people in China, you must first create a legal entity in China. There are three basic types of legal entities for foreign companies seeking to go into China.
One is the joint venture in which the foreign company forms a sort of partnership with a Chinese entity. These are generally the most difficult, most expensive, and most risky and since you do not have a Chinese partner in China, it likely will not make sense for you to go into China as a joint venture. But just in case you have an interest in that, I suggest you read this American Chamber of Commerce article written by our lead China attorney on the potential problems of joint ventures in China and this Wall Street Journal article I wrote on why joint ventures are becoming far less common in China.
Another way for foreign companies to go into China is via a representative office. This is where you form a Chinese entity that can only represent your interests in China; it cannot actually conduct real business there. Essentially it can do little more than market your company. Based on what you have told me, such an entity would not make sense for you in China because you want personnel there to negotiate contracts for you at the lowest prices and to do that, they will need to be able to pay for many of those contracts in Yuan, not Dollars. A Rep Office will not be able to do that. The advantage of China Rep Offices is that they are relatively cheap and easy to form.
Based on what you told me, a Wholly Foreign Owned Entity (WFOE) sounds best for you. A WFOE will be its own free-standing Chinese company, able to do just about everything a domestic Chinese company can do. We can set this company up to be 100% owned by your existing Spanish company as a subsidiary, or we can form a new Spain or Hong Kong company to own it.
2. With your Chinese entity, you will be able to hire and retain employees. China has very strict employment laws that require you have written contracts with your employees (or face severe sanctions) and these laws greatly limit terminating an employee for any reason not set forth in your Company Rules and Regulations (a/k/a employee manual). This post gives a basic explanation of China’s new employment laws. What you need to know is that China’s employment laws apply to every company in China and to every employee and that the best defense against them is a good contract and a good employee manual, both in Chinese.
3. Based on our conversation, it is also going to be important for you to register your trademarks/trade-names in China. This article explains why it is critical you secure China trademarks.
4. It also sounds as though you need us to write your China Manufacturing contracts for all your China product purchases as well. A good OEM contract greatly decreases the likelihood of you receiving bad or late product while greatly increasing your chances of being able to get recourse should a problem arise. Here’s an article on how enforcing contracts in China can be way more effective than most people realize. And just in case I have not given you enough to think about, here is an article on the legal basics of what companies need to think about if they are going to do business in China.
We would love to get started in helping you get started in China. Let’s talk again next week about next steps.