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 Bricken, 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.

  • I really love how “setting up in new industrial zones that are eager for overseas investment or lesser-known cities that encourage specific types of business development” is mentioned. When I was living in Weifang I got to know a number of businessmen engaging in or setting up business in Weifang. All of them expressed to me how impressed they were by the price and quality of office space and other resources available in and around the city. Furthermore, some of them had lived in or been in China multiple times on business over the years, and so weren’t just wide-eyed newbies. If I were an entrepreneur looking towards China, I would probably set up a business in a lesser-known Chinese city.

  • Kevin S. —
    You have two choices. Either you will write a long post on your blog, explaining why you would set up your China business in Weifang or some other second tier city (is Weifang, second or third tier?), and exactly what sorts of businesses make sense for Weifang and why. Perhaps, 3 pages, minimum, single space.
    Or, you will allow me to grill you on all of this via telephone or e-mail.
    I am leading a one hour session in early May at a big time Real Estate in China seminar in SFO and the session I am leading is on second tier cities. Pick your poison, big guy.

  • less known chinese cities are smart choice for foreign investors! here, a chinese industrial zone is seeking foreign investment:
    maybe it’s a good opportunities for you!

  • I’m heading out to ChangZhou (Jiangsu Prov) on tour of their new Development Zone. I’ll be finding out all about their policy for new business set-ups. Will give a full report with photos. Should be interesting.

  • Keanu —
    Thanks for checking in. Interesting idea.

  • Andrew —
    We will be eagerly awaiting the report. It will be interesting, though, to see if China’s new income tax laws will strip the value out of special economic zones.

  • I’d like to go for option 1: take the bull by the horns and feign ignorance of ever making such a bold comment that I can’t actually back up with hard facts.
    Still, I did my best to meet your challenge without spending an entire day gathering facts or going through the trouble of calling Weifang’s leaders and having them give me the pitch themselves.
    It is rather long, though not quite 3 pages single spaced. 🙂 If you are interested you can find the post on my blog, “Why Do Business in Weifang?” Of course, coming from a teaching and not a business background it is amateurish.

  • nanheyangrouchuan

    “We will be eagerly awaiting the report. It will be interesting, though, to see if China’s new income tax laws will strip the value out of special economic zones.”
    It will also be interesting to see how vigorously local authorities enforce the new tax policies if it means a potential loss of foreign investment in their areas.

  • Kevin S.
    For some reason, did not see this comment until now. Seeing as how I’ve already run a post on your post, not much more for me to say.

  • nanheyangrouchuan —
    Report is done and can be found on Kevin’s site and also I did a post on his post.
    We are all waiting to see what the new tax laws will really mean.

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  • amy

    Great post. I have been involved with the formation of two WFOEs and in both cases we encountered slowdowns due to our real estate lease. I like your advice to get your lease in order early.

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    How exactly do you go about calculating what the minimum capital requirements will be for each new business?