In 2022 alone, as far as FDI recipients are concerned, with the total coming to US $189 billion, China’s consumer market still remains a huge attraction for foreign firms. This growing consumer class in the country is drawing foreign entrepreneurs to consider expanding their operations there. Unlike Western countries, the cultural differences and language barriers also present special problems for doing business in China. To reduce the risks involved in doing business in China, foreign investors must understand the essentials. For a better understanding of how to start a business in China, see the detailed guide, 8 Steps to Starting a Business in China.
Content Outline
1. Conduct China Market Research and Make Your Plan
For foreign investors who want to go into business in China, market research is a must. This first step lays the foundation for understanding the marketplace, finding the most promising opportunities, and then pinpointing your target clients. It also allows you to analyze available resources and project potential risks.
2. Select a Location & City to Start Business
For foreign investors who want to go into business in China, market research is a must. This first step lays the foundation for understanding the marketplace, finding the most promising opportunities, and then pinpointing your target clients. It also allows you to analyze available resources and project potential risks.
Shanghai – Financial Center
As an international port and mainland city with the greatest GDP, Shanghai has always been a major entry point for foreign investors into the Chinese market particularly this again is relevant today. Take its appearance in the Forbes China survey: Forbes China’s survey “Shanghai Tops Forbes China Ranking of Best Cities for Business”, further highlights its distinctive appeal. It’s the vibrancy, sophistication and transparency of the city that attract more investors from abroad with every passing day.
China International Import Expo (CIIE) The China International Import Expo (CIIE), held in Shanghai in 2018, is the world’s top import-themed national-level expo and attracts even more foreign entrepreneurs setting up shops in China.
Shanghai Free Trade Zone (SFTZ) In 2013, China established the Shanghai Free Trade Zone (SFTZ), which has more than 50,000 foreign companies. Engaging in business within the Shanghai Free Trade Zone offers several advantages:
- Tax incentives for trade companies
- Simplified customs procedures
- Foreign investment is allowed into fewer industries.
- Easier foreign exchange controls
- Simpler company formation process
- Financial supports to financial institutions
- SFTZ company attracts talents through sweet policies.
- Industry business centers
Beijing- Capital City
As capital, Beijing has quickly become one of the world’s most advanced commercial centers. It is both China’s political center and a focus of science, education and culture.
Shenzhen & The Great Bay Area
Shenzhen is famous in China for being a great place to start up businesses, especially those technological in nature. It is well-known as one of the greatest places for investment with a good investment climate. Moreover, this city has produced great companies like Tencent, DJI, Huawei, and BYD.
An open door through the policy of a free market and flexible government measures has brought foreign products into the Shenzhen Special Economic Zone (SEZ). Subsidizes the establishment of R&D centers, startups, corporate headquarters, financial enterprises and professional service companies uncrowded design.
3. Test the China Market – Using a China PEO & Employment Agency
Setting up a business in China is both expensive and time-consuming, as well as demanding on continuing resources. Existing a business in China, even if it’s failing, is also another slippery slope. Here are some tips for foreign investors on how to start a business in china. We recommend business owners enter the market by employing local Chinese employees before making a long-term commitment.
One strategic approach to take before officially establishing a company in China is to hire a team of employees using an EOR (Employer of Record) and recruitment agency. This entails hiring representatives, salespeople, or consultants to test and feel out the Chinese market. The employment agency and the EOR take care of these legal requirements by signing conforming labor contracts with selected employees, acting as legal employers. They handle employee onboarding, monthly payroll, taxes and social insurance to make sure they are compliant with local laws.
A flexible way to test the Chinese market with FastLane Group China PEO & employment solution enables the hiring of employees without a legal entity existing. Once business opportunities look promising and trust in the market is maintained, investors are then able to form a formal company. Should business prospects be promising and trust in the market gain ground, investors can then take formal steps to incorporate. On the other hand, if business is not doing well then leaving China becomes easier. In this way, you can inform the China PEO & employment agency, ending all relationships with employees. This simplifies the exit process.
Read Enhancing Business Efficiency: PEO and EOR Services Explored
4. Choose a Company Structure/Type
In China, when starting a business there are many options to consider in setting up a legal entity. Choosing the right company structure is an important decision for any firm looking to enter China. In China, the most common entity forms for foreign companies are Wholly Foreign-Owned Enterprises (WFOEs), representative offices and joint ventures.
Wholly foreign-owned enterprise (WFOE)
A Wholly Foreign-Owned Enterprise (WFOE or WOFE) is a limited liability company wholly owned by foreign investors. It is extremely popular for starting up in China because the foreign parent company has total autonomy and control. In China, there are three prevalent types of WFOEs–consulting WFOE, trading WFOE and manufacturing WFOE. However, one must first make clear that different business scopes require different applications for pre-license or post-license. Only after obtaining such certificates is the company granted official permission to do business in China.
Read: Complete Guide to Set up a WFOE in China
Representative Office (Rep Office & Ro)
A representative office (RO) is a local Chinese office of a foreign company. A foreign company may establish its physical presence anywhere in Mainland China to conduct market research, organize activities and perform business as the representative.
On the other hand, the representative office is not a registered company in China. Therefore the RO office cannot carry out any profit-making activities in China. RO is also not permitted to hire employees directly and sign labor contracts. The only option is to go through the PEO & Employment agency. WFOE can hire employees directly in China.
Joint Venture (JV)
A Joint Venture is a limited liability company established through a joint effort by Chinese investors and foreign-invested enterprises (FIEs) who divide the costs and shares of its assets as well as its liabilities and take part in its management. Because a lot of businesses in China are banned from WFOE to operate, many foreign investors establish JVs with Chinese partners and then legally operate business. But JV in China is very complicated, time-consuming and the costs involved are also quite high as it involves law firms.
5. Create Your Company/Legal Entity
After selecting your company type, prepare documents in order to establish the entity. Foreign investors are probably better off using experienced company formation vendors in China to administer all the paperwork for them, which is quicker and more convenient.
Below are the general WFOE Incorporation Process & Timeline for your reference.
| Steps | Government Processing Time | |
|---|---|---|
| 1 | Rent office space | Depends on Client |
| 2 | Apply for name approval and registration | 1 working day |
| 3 | Apply for a “5-in-1” business license from AIC | 7 working days |
| 4 | Carving chops for the new company | 1 working day |
| 5 | Customs and import-exit registration – Only trading WFOE | 10 working days |
Required documents for forming a WFOE:
- General registration information: such as company name, shareholders, business scope and registered capital.
- Certified Notarization documents for investor’s Business License
- Business License of investor: Translated Certified Notarization documents.
- Legal representative passport/ID
- Finance manager’s passport/ID
- Supervisor’s Passport/ID
- Liaison Person’s passport/ID
- Controller of the investor’s passport
It is also possible that the local government will change them when you start a business in China. If you want further information on laws governing the establishment of commercial operations in China, the Chinese Bureau of Commerce has a most resourceful English-language site.
6. Opening Corporate Accounts
After you have registered your company and received your business license you will be able to formally start doing business, but there are a number of corporate accounts that must be opened for this purpose.
Bank Accounts
Foreign investors can choose from two kinds of banks. Among others, local banks such as China Merchants bank, Bank of Communications, Agricultural Bank of China, Bank of China, Industrial and Commercial Bank of China and China Construction Bank. To open up a local bank, the chief representative had to be at the scene. Using the local bank, an account with automatic deduction for taxes and benefits can easily be connected to the government. However, popular foreign banks in China such as HSBC and CITI do not require the chief representative to always be onsite. The bank fee is more than that of domestic banks, and you have to provide more documents originally. Most importantly, Hubi doesn’t allow auto payment made by the tax or social benefits bureau.
Social Insurance & Housing Fund Account
After both your business license and bank account have been registered, before hiring a Chinese employee in China, you must open your company social insurance and housing fund account. These two accounts are necessary for the local social security bureau to go through the on-boarding and off-boarding processes. They also serve as receptacles whereby one makes contributions to the required per month mandatory social insurance (SI) and housing fund (HF).
Corporate Tax Account
Once company registration is complete, every firm is required to send its finance supervisor in person to the local tax bureau for the completion of company tax accounts and corporate tax rate confirmation.
7. Protect Your Intellectual Property-Trademark
For businesses in China, intellectual property (IP) remains a major and lasting concern. If you don’t protect your intellectual property in the country by registering their patents, copyrights and trademarks, there will be no formal protection. Thus it’s important for foreign companies to quickly register their IP once they begin operations in China.
8. Start on Monthly and Yearly Administration Operations
Doing business in China required WFOE to complete mandatory operations based on local policies, which primarily covered the sectors of human resources and employment, as well as tax and accounting. You can complete the below tasks in-house or outsource them to a payroll and employment agency once you found the candidates.
- Monthly payroll involves calculating and disbursing employee salaries in China on a monthly basis.
- Tax declaration mandates monthly reporting of individual income tax by the employer. Corporate income tax is declared quarterly, while VAT requires monthly declaration.
- Mandatory contributions to Social Insurance and Housing Fund.
- Bookkeeping responsibilities.
- Annual tax return filing and audit processes.
In conclusion, starting a business in China involves a complex process. Conducting thorough research and collaborating with experienced service providers are crucial steps to ensure a smooth and compliant entry into the Chinese market.
About FastLane Group – China PEO & Employment Expert
FastLane Group is a professional service company that aids foreign-invested companies in conducting business operations in China. Our key service, China PEO and employment solution, empowers foreign investors to recruit employees in China without establishing a company, enabling swift expansion into the Chinese market within days, not months. Our local experts possess in-depth experience in facilitating businesses to establish their own legal entity in China while ensuring compliance. For further information on China PEO and how to start a business in China, please reach out to us.