The other day I received an email from a college student looking to form a business that would buy product from China and sell it in the United States. The email asked about the steps to take to get such a business going. Here is that email (modified slightly to maintain the anonymity of its sender):

I am an American college student studying International Business and Chinese at ______ University. This past semester while studying abroad at in China a friend of mine, _______ (who met you in Chengdu), turned me on to the China Law Blog.

A few friends and I have decided to start a company soon after graduating next May. The company will produce and sell product X, starting in the U.S. and then moving to China and elsewhere abroad. Right now my friend’s father is developing the prototype product X, which is coming along with great success. In the meantime, we our trying to structure the company and figure out the logistics of the start-up.

I’m seeking your advice because we want to manufacture product X in China but don’t know how to get started. I have often read your articles describing the risks/dangers of manufacturing there, and I want our company to approach the production of our product in a smart, cautious way. Once the prototype is complete, how do we go about finding reliable manufacturers in China for our product? I know about the importance of protecting IP rights and (some of) the differences between contracting in China vs. America, but I want to know: what is the next step after the our prototype is complete and we have buyers? Where should we go from here??

Thanks a lot for your time and consideration! I hope to hear from you soon.

I responded as follows:

Thanks for writing and thanks for the loyal reading.

1.  Form a US company (probably an LLC) and have a good member agreement drawn up among the owners.  Hire a local lawyer for this.

2.  Make sure your IP is protected in your primary selling market (the United States?).  I doubt you will have anything that can be patented, but that should be a consideration.  Patents are very expensive, however.  If you are going to call your product, product X (that sounds good to me), you should trademark that in the United States.

3.  Now find the manufacturer. There are many ways you can go about this. The best and usually the cheapest is to do tons of internet research and then narrow it down to 4-5 and then fly to China and meet with those factories. If you are going to be doing something really different than other people making this product, you should require the factories sign a Non Disclosure (NDA) Agreement (read about these on the blog) before you show them anything.  This should be in Chinese and in English. The alternative is to hire a sourcing company to find the right factory for you and to negotiate on your behalf. If you choose that route, we can give you names of the people we know and trust who do this. These people can also usually help with things like shipping as well.

4.  Then have a really good agreement with the manufacturer and you need to trademark your product name in China and you should be good to go (assuming your product does not call for a China patent). This agreement with the manufacturer is called an OEM Agreement, a Manufacturing Agreement or a Supplier Agreement and this should be in Chinese and in English as well.

I am sure I have left  out a few things, but the above are the basics.

Good luck.

What do you think?

  • Canoli Man

    Here’s the Executive Summary:
    1) Form a company in the United States;
    2) Register your IP in the United States;
    3) Find a manufacturer in China, and draft a supply contract;
    4) Register your IP in China.
    This seems like the key four things to me. Super basic, but I see people missing out on at least one or more of these all the time.

  • Helpful info. China is a huge and rapidly developing market and there is a big interest into having business there. Gonna bookmark this blog post

  • Leon Warren

    Dan, I see your responding to this college student in such a thoughtful and thorough way as the best advertisement for using your services yet. If you take that sort of time and care for random college students looking for their start in life, I can only imagine the care you give you to your paying clients.

  • Eric

    I fully agree that these are the basics, but I would place registering IP in China as 2.1., this is, registering the IP on China at a very early stage.
    Many of my first time clients share the similar story of manufacturers registering their trademarks on their own name and no one has been able to answer me why they choose to file all the IP registrations in China as a final step.

  • David

    I love the idea of an extreme basics series. What’s the extreme basics for quality control?

  • Very helpful! Thank you for sharing this students’ question and your response.

  • Toronto Ross

    There’s a story behind these comments I feel.

  • Hank

    The advice given to set up a company in the US may not be the best way. He might be better off registering in Hong Kong so he can offset his overheads there and arrange the transactions to pay less tax than he otherwise would in the States. US nationals can set up, direct and own companies in HK. You still have to file US returns showing you’ve done that but you can offset more expenses against income than US law permits directly. It can be a more effective use of financing China transactions and it migth save the kid some US taxable income.

  • George Clinton

    @Hank – well the article was titled “extreme basics” but basics is no way enough for China.

  • Dan

    @Hank,
    George Clinton (is this the George Clinton of P-Funk fame?) is right. This post was meant to convey the extreme basics. Getting into the pros and the cons of setting up an HK entity would go way beyond what my email and this post were intended to convey. Deciding whether to form a Hong Kong entity is rarely a simple issue.