5 options to consider when setting up your business in China
- Posted by Market Me China
- On 25th August 2017
Once you’ve identified your market and opportunity in China, the really exciting work begins as you move ever closer to making that all-important first sale.
As a foreign business setting up in China, you might not know there are actually lots of options available. Here we walk you through the different company structures you can use in China, how they work as the Pros and Cons of each – helping you make an informed decision
1. A Wholly Foreign Owned Enterprise – WFOE (sometimes also called a Wholly Owned Foreign Enterprise – WOFE)
This is often the default option for most companies setting up a business in China. There’s a good reason for this as a WFOE gives businesses 100% invested ownership over the subsidiary in China.
Why set up a WFOE in China
• A WFOE can demonstrate to shareholders and investors complete ownership in a China subsidiary of your own.
• This gives you freedom of operation and full business functionality on par with domestic companies
Why you might not want to set up a WFOE
• This can generally take longer to set up and has a higher fixed cost
• Winding down a WFOE can be a lengthy process if you choose to close your China business. Definitely not a great option if you have a one-off deal or are testing the market.
2. Joint Venture
A Joint Venture, partners your company from overseas with a domestic company in China to form a separate entity and completely share all related expenses, management, profits and liabilities of that company.
A note of caution here, no matter how reliable, well-connected and well-funded your potential JV partner may seem, thorough, impartial due diligence is key before considering such a deal
Why set up a Joint Venture in China
• You have access to the network of a local Chinese partner.
• A Chinese Joint Venture partner can provide a ready-made sales network for your business in China.
• You can demonstrate clear (albeit partial) ownership over your business in China.
Why you might not want to set up a Joint Venture in China
• It can be difficult to maintain control & leverage over your Chinese Joint Venture partner.
• There is always the risk that you could hand over your IP to your Chinese Joint Venture partner and lose control if the partnership is dissolved.
3. A Local Company
A local company or Variable Interest Entity (VIE) structure has long been a common way for companies to set up a business in China in a sector that is restricted to foreign investors.
If you have Chinese staff members or local partners, then it is possible for them to set up a local company, while allowing you a degree of control over it. This can then be underpinned by an international contractual arrangement commonly called a ‘Variable Interest Entity’.
Why set up a local company in China
• If you’re trying to operate in a restricted sector such as e-commerce, education or media.
Why you might want to avoid setting up a local company
• This can require complicated contracts and arrangements to dictate ownership and retain control over your Chinese company
• There is potential for a valuation discount from investors due to your indirect control and government risk in China
4. A Representative Office (Rep Office)
Opening a Rep Office is, on paper, the easiest and most straightforward structure for opening a business in China. It provides you with a foothold in the market and enables you to employ operations and marketing teams in China.
Why set up a Rep Office in China
• Quick and easy to set up
• Suitable if you need people on the ground to promote and market but fulfill sales elsewhere
Why avoid setting up a Rep Office in China
• A Rep Office in China is prohibited from engaging in any commercial profit-making areas of business
• An inability to issue VAT Invoices (‘Fapiao’) renders a local presence under a Rep Office in China largely meaningless.
• There is a heavy tax burden on expenses which can add up to about 12% of total expenses booked through a Rep Office in China.
5. Using a Pre-Company Agent
This option enables you to quickly open a business in China that is fully compliant and fully functional yet asset light, helping you focus on growing sales in China.
If you have a defined opportunity in China that necessitates the employment of people in-market but are not ready to commit to the fixed investments of opening a freestanding corporate entity then you can appoint an agent to act to either employ staff, fulfill sales and import goods (and sometimes all three).
Why use a Pre-Company Agent in China
• A quick and easy option to open a business in China
• You can leverage strong local expertise of how to operate in China immediately
• You can easily transfer to your own WFOE in China if your business in China takes off
• This option is easy to wind down if your China market entry plan stalls
Why avoid using a Pre-Company Agent in China
• No direct ownership over an entity in China
As you can see, there are lots to consider when making that first step in setting up your business in China. LNP China has written extensively on this topic, providing practical insights along the way.
This guest post is brought to you by LNP China, China business operations specialists, enabling companies to rapidly enter the market and grow their business, without you needing a single employee on the ground.