The Legal Basics on Starting a China Business

China hospitals

One of the many things I love about being an international lawyer is the opportunity to learn about so many different countries and industries.

What so often happens to lawyers is that we get one client in a particular industry, and then, through word of mouth, we end up getting a whole slew of others in the same industry. That has happened to us in spades with clinical testing, a global industry booming in China. I woke up this morning to an email between one of my law firm’s China lawyers and a potential client needing help in establishing its clinical testing business in China.

The email does a great job laying out the basics of what clinical testing companies must do to establish themselves in China and to protect themselves from employee and IP issues. But nearly everything in this email applies with equal force to pretty much all service businesses seeking to get off on the proper legal foot in China. This email sets out the essential big three for doing just about any business right in China:

1) Proper entity registration
2) Proper HR/employee protections
3) Intellectual property protection.

Here is the email, with a few changes to protect the recipient’s identity:

As you know, the medical testing field has great promise in China. However, working with Chinese hospitals is extremely difficult. Frankly, India and Russia are even worse in this regard, so working in China makes a lot of sense.

Based on our discussion, this is what you will need to start up in China:

Form a WFOE. The key is to pick the city. If you go with a second tier city, the cost will definitely be less than in a Shanghai or Beijing. You can always add branches if you set up offices in other cities later.

Employment agreements. The new labor contract law requires you deal with employment very carefully. For a company like yours, you will need the following:

a. Basic employment agreement.
b. Company rules and regulations.
c. IP/Trade Secrecy agreement.
d. Non-Compete agreement with key personnel.

For employers with a U.S. background, there is always a certain amount of shock at the detail and complexity of these agreements. HR is currently the number one issue for foreign investors in China. Starting with the right contracts done the right way is key to future success.

Basic agreements for trials.

a. Agreement with hospital.
c. Three way agreement.

If possible, it would be good for you to make these agreements “modular” so you can reuse the agreements with new hospitals.

What are you seeing out there?

3 responses to “The Legal Basics on Starting a China Business”

  1. Dan,
    Would the same hold true if you are a foreign company opening in China where the majority of your clients (as well as your staff) are expats. [For example a travel agency that wants to book in country China tours as well as outbound tours (like China to Japan) for expats coming into China as well as those already in China]? Is that company still answerable to the domestic China laws where the majority of its service is not focused on local Chinese citizens or markets?

  2. your advice in the mail are definitly right and impressive. yes, the second tier cities like suzhou(soochow) which is close to shanghai are good locations for investment in china, specially your investment is to establish a clinical texting company or your company can be run without commercial service or technical support which can only be attained in a big city like shanghai. The tier cities in china are developing quickly and the government is asking the young university graduates to persue their career there. But the only stuff which should be considered carefully is the efficiency of the local government.
    maybe, i can answer laosan’s question. all kinds of commercial presence in china should obey the local law no matter which marcket you run for. but the treatment may be different between the domestic companies and the foreign ones. that depends on the more detailed domestic laws.

  3. Foreigners are not allow to run a WOFE travel agency. That means you have to use a Chinese travel agency with the correct registration to have international clients and thus you abide by Chinese rules and laws.

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