Introduction
With one of the largest consumer markets in the world, a large population of consumers and a culture willing to embrace products from other parts of the world, China is a prime location to establish a new business venture. However, Chinese regulations, complex immigration laws, and complicated business regulations often impose obstacles that keep many young companies out.
At Horizons, we help open doors to new markets. We help foreign companies implement overseas strategic development. We can help startups adapt the practices for this new market in order to realize sustained success in the Chinese markets.
When establishing a startup in China, you have several different options. Horizons can help you with establishing any of the business entities described below. We can help you select the most appropriate type of entity to expand to China as a startup.
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Entities to Expand to China as a Startup
Wholly Foreign Owned Enterprise
A Wholly Foreign Owned Enterprise or WFOE is an independent limited liability company that is registered in China that foreign investors completely own as individuals or corporations. Unlike a Foreign Invested Enterprise which can refer to any company with a 25% or greater foreign investment, a WFOE is completely comprised of foreign dollars.
These businesses register with the Chinese government and operate within the business scope that they register. The foreign company can conduct business activities in China with customers, clients, partners, and vendors.
The process to establish a WFOE, also called WOFE, can sometimes take several months before the business launches. The business is the employer of record and assumes all associated liabilities. The WFOE has full control and responsibility for all human resources tasks. It has the legal ability to hire foreign and local staff. While this option allows a business to more intimately integrate into China, it also requires a greater initial investment.
Representative Office
A foreign enterprise can form a representative office, but it is not technically a legal entity in China. The representative office allows a foreign company to establish a presence in the country.
However, this type of arrangement has significant limitations. For example, the representative office cannot conduct financial transactions or issue invoices in China.
Representative offices are primarily used to provide technical support, promote products, conduct market research and other permitted activities in China. It is typically less expensive than establishing a WFOE.
Joint Venture
A joint venture is a legal entity that is registered in China. It is a partnership between a foreign business and a local Chinese company. This entity allows foreign companies to benefit from having a local partner in the business and important networks.
The joint venture conducts business in China like other Chinese companies. It must carefully follow its formal formation documents regarding profit sharing, technology ownership, and operations.
This type of entity is preferable when an exclusive local partner is necessary or when certain business activities need to be performed in China. In some industries, joint ventures are the only option for foreign companies that come to China.
There are different types of joint ventures. An Equity Joint Venture is one formed as a limited liability company. This type of company can have its own assets and is responsible for its transactions. The liability of investors is limited to their contribution. Investors have the right to distribute profits according to this contribution.
A Cooperative Joint Venture is one in which a local company usually provides labor, factories, and land use rights. Foreign companies may assist by investing capital and assets into the company. There is not a minimum foreign investment necessary to establish this type of joint venture.
It often takes several months to establish a joint venture.
Sales Office
The sales office provides in-country representatives to develop the business. Financial transactions take part in the foreign country. This type of formation is possible through a collaboration agreement with a Professional Employment Organization (PEO), which serves as the technical employer of records. The PEO assumes all employment liabilities.
Advantages of Using a Professional Employer Organization in China
Many of the options above have strict criteria that must be met. In some situations, you will have to submit a five-year business plan to the Chinese government. These plans must be very detailed because the work described in the plan will be the only type of work that can be legally completed in China.
Some types of business entities only allow business to be conducted within the city where there is a business physical presence. Additionally, different cities in China have different policies related to these types of businesses that must be adhered to in order to avoid compliance problems.
Some types of businesses cannot directly hire employees. Company owners may not be familiar with immigration laws and may not know how to avail themselves of expatriates and others with specialized knowledge that can benefit the company.
Business owners may be reluctant to go through the company registration process, have environment impact assessments completed, invest in facilities, open foreign bank accounts and complete many other activities that are necessary to form a business abroad.
It may take months or even years to meet all of the regulations required to launch a business in China. To avoid these issues, one popular option is to use a Professional Employment Organization.
Only companies that are based in China are legally permitted to hire Chinese employees. A Professional Employment Organization like Horizons can help identify, locate and manage the administrative duties related to local employees.
The PEO is the employer of record and is responsible for payroll processing, benefits administrations, and other human resources functions. Through employee leasing, businesses can use the employee to complete daily operational tasks.
How Horizons Can Benefit Your Company
Horizons has a dedicated legal team that can help you determine the most appropriate entity for your startup. We can take care of all incorporation and legal entity registration tasks.
We provide employment contracts and advise clients on labor laws so that you always remain compliant with local regulations. We also assist with legal support in all major cities in China.
We can provide PEO services if you do not want to form a separate legal entity in China or if you want to begin your expansion before the registration is complete and want an interim team on the ground.
Our comprehensive PEO services include complete payroll processing, formation of employment contracts, benefits administration and termination procedures. We also assist with all aspects of tax compliance and can inform you of preferential tax treatment for foreign investors in certain industries and geographical locations.
Contact us today to get started on expanding to China as a startup.
