Starting a Business

Everyone knows that China is poised to become the world’s next economic and political superpower. Within the next five years, more new jobs will be created, more degrees will be earned, and more growth will be piled on than in any other 5-year period in the history of the world.

As a conscientious international investor and businessperson, you’ve certainly spent time contemplating how to leverage your company’s services against these dynamic markets. Despite their amazing surge forward, however, China’s cities are still complex, often seemingly irrational places to do business. But with the potential payoff as large as it is, the risk is well worth the effort.

China Commercial Law Firm business team provides the guiding hand that will make your move into China a safe decision for even the most-risk averse companies. Our team of American-, Australian-, & Chinese-born professionals have decades of combined experience on the ground in China. Our staff features only motivated & talented lawyers, accountants, and commercial real estate consultants. Plus, our strategic partnerships guarantee we’ll be there with an answer when you need it.

This sets out the basics on forming a Wholly Foreign Owned Entity (WFOE) in China.Foreign companies can go into China as a WFOE, as a Representative Office (RO), or as part of a Joint Venture (JV).For the last few years, well over half of all foreign companies are choosing to enter China as a WFOE.

Make Sure Your Business is Legal For Foreigners

Determine if the proposed WFOE will conduct a business approved for foreign investment by the Chinese government. For example, until recently, China prohibited private entities from engaging in export trade. Be sure your business will be legal.

Provide The Proper Documentation

The investor in the WFOE must provide the documentation from its home country proving it is a duly formed and validly existing corporation or Limited Liability company, along with evidence showing the person from the investor who is authorized to execute documents on behalf of the investor. The investor also must provide documentation demonstrating its financial adequacy in its home country.

Investor Documents Needed

The Chinese government normally requires the following documents from the investing business entity: * Articles of Incorporation or equivalent (copy) * Business license, both national and local (if any) (copies) * Certificate of Status (original)(U.S. and Canada) or a notarized copy of the Corporate Register for the investor or similar document (original)(Civil Law jurisdictions) * Bank Letter attesting to the account status of the investor company (original). * Description of the investor's business activities, together with added materials such as an annual report, brochures, website, etc. The first four of these must be in Chinese. The last one may be submitted in English, with a Chinese summary.

Consider Forming a Special Purpose Company to Own the WFOE.

Many investors create special purpose companies to serve as the investor in China. China's company regulators have become accustomed to this process. However, the Chinese regulators will often still seek to trace the ownership of the foreign investor back to a viable, operating business enterprise. It is common to form a Hong Kong company for this purpose.

Secure Chinese Government Approval

In China, unlike in most countries with which Western companies tend to be familiar, approval of the project by the relevant government authority is an integral part of the company registration process. If the project is not approved, the company will not be registered.

Compile and Provide These Documents for Chinese Government Approval

*Articles of Association.This document will set out all the details of management and capitalization of the company.All basic company and project issues must be determined in advance and incorporated in the Articles.This includes directors, local management, local address, special rules on scope of authority of local managers, company address, and registered capital. # Feasibility Study.The project will not be approved unless the local authorities are convinced it is feasible.This usually requires a basic first year business plan and budget.We typically use the client produced business plan and budget to draft up the feasibility study (in Chinese). *Leases. An agreement for all required leases must be provided.This includes office space lease and warehouse/factory space lease.It is customary in China to pay rent one year in advance and this must be taken into into account in planning a budget because the governmental authorities will be expecting this.

Compile and Provide These Additional Documents for Chinese Government Approval

You will also be required to provide the following: *Proposed personnel salary and benefit budget. If the specific people who will work for the company have not yet been identified, one must specify the positions and proposed salaries/benefit package. Benefits for employees in China typically range from around 30% to 40% of the employee base salary, depending on the location of the business. Foreign employers are held to a strict standard in paying these benefit amounts. The required initial investment includes an amount sufficient to pay salaries for a reasonable period of time during the start up phase of the Chinese company. *Any other documentation required for the specific business proposed. The more complex the project, the more documentation that will be required. All of the documents in both Step 6 and Step 7 must be in Chinese.

The Approval Process

It usually takes two to five months for governmental approval, depending on the location of the project and its size and scope. Large cities like Shanghai tend to be slower than smaller cities. The investor must pay various incorporation fees, which fees vary depending on the location, the amount of registered capital and any special licenses required for the specific project. Typically, these fees equal a little over 1% of the initial capital. On large and/or complex projects, the approval process often involves extensive negotiations with various regulatory authorities whose approval is required. For example, a large factory may have serious land use or environmental issues. Thus, the time frame for approval of incorporation is never certain. It depends on the type of project and the location. Foreign investors must be prepared for this uncertainty from the outset.

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