Global Mindset. Local Instinct.

How to Start a Business in China as a Foreigner

by | Sep 16, 2020 | Business & Commercial Law, Greater China Practice

Is China a good place to start a business?

Yes! China has a lot to offer a foreign investor, from cheap labor relative to the U.S. to advanced infrastructure and tax incentives for foreign businesses.

How can a foreigner start a business in China? How long does it take to open a business in China? Join YK Law in exploring the eight steps you must take to do business in China as a foreigner.

Step #1: Identify Market Opportunities

Prior to starting your business you must determine what product or service has potential for profit and growth. China is called “the world’s factory” for a reason, and you may already be in business selling a product and are looking to manufacture it yourself, on Chinese soil. Or, there may be growing demand for certain services in China, as China grows its economy.

Whatever type of business you want to start in China, do your research. Identify potential competition and calculate the share of the market you can capture, and what you will do to capture it.

Be sure to start with a marketable idea for a service or product that is in demand, in China, or that can be manufactured in China and sold abroad.

Step #2: Choose Your Business Location

Depending upon what business you are in, you’ll need access to things such as the local talent pool, resources and materials if in production, factory, warehouse, or office space, and perhaps transportation or ports. If you have business partners, you’ll want to consider proximity to them as well.

China is evolving quickly and new business hubs are forming all the time. Right now, established cities such as Shanghai, Beijing, and Guangzhou offer a cosmopolitan culture, office space that is plentiful and of high quality, and industrial spaces.

For example, Shanghai’s local government has taken steps to attract foreign investors specifically. In Shanghai’s Free Trade Zone (FTZ), foreign investment is restricted in very few industries, foreign-owned businesses pay less taxes than elsewhere in China, and the strict administrative controls found in other large cities are relaxed.

Other FTZ locations include Shaanxi, Tianjin, Liaoning, Henan, Zhejiang, Guangdong, Hubei, Chongqing, and Sichuan, among others.

Step #3: Choose a Legal Structure

You have five options to choose from in order to do business in China:

  • Joint venture,
  • Representative office,
  • Wholly foreign-owned enterprise (WFOE),
  • Distribution agreement.
  • Umbrella company.

In a joint venture, you go into business with a local partner. A representative office does not yield revenue, it is used for communication between business partners in China and abroad. While setting up a WFOE in China takes longer than other options, the advantage is that a foreign owner has full control over the business.

If you wish to sell products in China that are made in China, entering into a distribution agreement with your Chinese manufacturer might be the best option. While you will need a separate business license to transact under your business name, the agreement will protect your intellectual property rights set forth the terms of manufacturing and sales. If the Chinese manufacturer is making and selling your product, they will be entitled to a sale agency fee.

Setting up an umbrella company works best for service-based businesses such as consultancy or marketing, but can also work for import-export. Your China-based employees can be based in a registered office in a host business and work with that local business. It’s easy to obtain work visas for your employees this way, and the host business can assist with recruitment of local talent as well as human resources and administrative tasks such as paying taxes and salaries, maintaining insurances, and organizing maternity leave. A business operating this way can eventually convert to a WFOE if desired.

Step #4: Create Your Business Plan

In China, preparing an effective business plan is critical to your success. The plan must be specific enough to gain approval, yet general enough so that if you must deviate slightly from it, you will not be fined by the Chinese government. Besides a description of your industry and product or services, your business plan should include:

  • The location of your business;
  • Your projected revenue;
  • The expected number of employees;
  • Your budget requirements;
  • Your employment process;
  • Operational workflow.

At this point you may want to consult with a lawyer who is well-versed in Chinese business law and practices. This business plan is something you will be submitting as part of government approval packages, so local knowledge will help you prepare the type of business plan the authorities expect to see.

Step #5: Open a Bank Account

You must open a business bank account in China if your business is registered as a WFOE. If your business isn’t incorporated, you can select from the various types of non-resident bank accounts offered.

Setting up a bank account in China as a foreigner can be difficult. The requirements are different in each province and city, so do your research. All banks require:

  • Proof of business registration, such as a valid business license, enterprise code certificate, tax registration certificate, or articles of association;
  • A list of the names of the business’ directors;
  • A company chop, which is a seal or stamp in China;
  • Valid ID of the legal representatives of the business (responsible officers, directors, and principal shareholders);
  • Description of the business structure and ownership;
  • A copy of recorded state approval for your business.

Many banking institutions with locations in the U.S. also have locations in China and may allow you to set up a Chinese account in the location where your business is operating. These institutions include Bank of America, Standard Chartered, Citibank, and HSBC, among others.

Step #6: Register with and Obtain the Approval of Chinese Authorities

As you might imagine, there are many hoops to jump through as a foreign entrepreneur in China. Documentation you will need includes your Articles of Formation certified by the Chinese embassy, copies of your investors’ passports, and bank references. You will also need to supply your business scope, amount of registered capital, copies of your letter of authorisation, your new office address in China, and contact information for your Chinese legal representative.

To get your commercial license and approval certificate, you will be submitting this information and documentation to the State Administration of Industry and Commerce (SAIC) and the Ministry of Commerce (MOFCOM), specifically, to MOFCOM’s local authorities which are the BOFCOM (Bureau of Foreign Trade and Economic Cooperation) or COFTEC (Commission of Foreign Trade and Economic Cooperation). You must also register with the Public Security Bureau (PSB), the State Administration of Foreign Exchange (SAFE), and the Tax Bureau.

In addition, you must register with and get the approval to operate from the local governmental bodies controlling your business location. Each city and province has different document requirements, and you are advised to provide all required documents in one package to avoid rejection of application. You can expect to receive an approval certificate within 90-days of application submission.

Step #7: Protect Your Intellectual Property

Promptly register any patents, trademarks, or copyrights, because the registration you had in the U.S. will not protect your intellectual property in the Chinese market.

In China the trademark rules are different. For example, the first person registering a trademark owns all of the rights to it, even if he or she was not the first to use that trademark.

To ensure your intellectual property is protected in China as well as the U.S., be sure to consult with experienced international IP attorneys such as the attorneys at YK Law.

Step #8: Hire Chinese Staff

Why? First, Chinese employees will help you navigate any cultural differences that will arise. They will also know the local market and be in a position to help you improve your product or service with their local knowledge.

If you are operating as an umbrella company, your local partner can help you find and hire local talent. The same applies if you have a distribution agreement or joint venture. However, if you have no local connections you might consider hiring a recruitment agency, which would also help you draft an effective employee handbook for your foreign-owned business in China.

YK Law Can Help You Do Business in China

If it seems complicated to start doing business in China, know that we are here to assist you.

YK Law has the experience and local partners necessary to help you with any aspect of business formation and other transactions in China.

Further, YK Law can help you protect your intellectual property, such as trademarks, patents, and copyrights, in China. Contact us to schedule a consultation. We will streamline this process for you and get your business up and running in China.