Great post over at DiligenceChina, entitled, “China Business Entry: Business Registration is a Group Project,” [link no longer exists]on how to get your business into China. I love the post because it is written from the perspective of a highly educated and knowledgeable businessperson (NYU MBA with substantial China business experience), rather than by a China lawyer.
I apologize for citing so directly from the post, but I fear that if I do not, I will imbue it with the legalese it so blissfully lacks. So here goes, with my own (sparing) comments, within brackets:
I managed to wrangle a lawyer and a real estate consultant into a single room for a meeting yesterday. The lawyer is China attorney Steve Dickinson, of Harris Moure, an international law firm based in Seattle with a number of lawyers in China and the real estate expert is Dan Turgel of WAT Property & Investment and I asked them to explain the company set-up process in China. Both are experts at Chinese business, fluent in Mandarin and have plenty of successful deals under their belts, so it was a very valuable session.
The results were complex and will be unique for each situation, but here are the important points:
- WOFE (or WFOE) is rapidly becoming your only real option. That’s Wholly Owned Foreign Enterprise [or Wholly Foreign Owned Enterprise/Entity]. Representative offices are cheap and easy to set up, but you are not allowed to handle money or sign contracts. Seriously. A real drawback, and they are starting to enforce the rule. Joint Ventures with unfamiliar local partners should not even be a serious consideration until you know the terrain and the players well.
- Get your lease taken care of early. You can’t wait until the business is already formed to start worrying about real estate issues. A 1-year lease is part of the application process. That’s one year from the date of the APPROVAL, which can take 4 months or so from the start of the application. The lease has to be certified, verified and authenticated. Chinese bureaucrats LIVE for this kind of detail, and you aren’t moving forward without one.
- Your China accountant, China law firm and China real estate people need to be involved in the process from the very beginning, hopefully in the same room at the same time. You want your China business formation to be a single, unified process ‘ not a series of fits and starts. When you find out you are missing a signature, chop, or form – you cannot tell the Chinese authorities the dog ate your homework.
- It’s not quick, cheap or painless, but it is possible and manageable. Every situation is unique and every location has its own variation of The Rules, so there are no hard and fast rules. But the business formation should run you in the neighborhood of US $10,000 to $15,000 and take between 6 months and 1 year (from the start of the process, not the application!).
- You will need to show a business plan, a manpower projection, pro-forma financials for the China project, and all sorts of verification about the existence of the US company. This will include an authentication by both the Secretary of State’s office (state level) and the Chinese Consulate in your jurisdiction back home. Start planning early.
- You also have to deal with minimum required capital rules, which vary for every business situation. Plan on something in the neighborhood of US$140,000 – $240,000, but every situation will be unique.
- Is there any way to cut corners and save money? Sure thing. Some methods make sense, like setting up in new industrial zones that are eager for overseas investment or lesser-known cities that encourage specific types of business development. Other methods are simply bad ideas, like using local consultants with special connections that involve forged documents, back-door approvals and other illegal methods. Steve warns investors that you’ll find that these informal methods may be effective for getting your investment funds INTO China, but will make it virtually impossible to get your money OUT when the time comes to exit.
- The rules are a bit complex and seem daunting at first, but Steve and Dan had no trouble laying the process out quite clearly, even to a simple MBA like myself. Within 45 minutes, I had a much clearer sense of what was involved in forming a new company in China. Understanding the specific rules is a lot less important than finding international consultants who are knowledgeable and reliable.
My only addition would be to note that minimum capital requirements in many second tier cities are often more like $15,000 and that even the higher numbers set forth above should not be daunting because minimum capital sent into China is available for funding business operations pretty much from day one.