Episode 08: When to start a company in China – reasons to set up an entity
In this episode I will talk about reasons to set up a company in China. Incorporating a company in China is not easily done so the process should only be started for the right reasons. Listen for my take on this.
In this episode I want to give you information about when it is a good time to incorporate a legal entity in China.
It is a very positive thing of course if you and your company are considering to set up business in China as it means that there are opportunities for the business or that your activities in China are growing. The good news is that is it possible as a foreign investor to own a company in China but you still have to keep in mind that starting a company in China should not be done lightly. I don't want to discourage you but I think it is very important that you will only start a company in China for the right reasons.
Based on our experience, the following reasons are usually what makes companies consider to start a company in China. Please note that I am talking about a company completely owned by you, a solely owned company, usually as a subsidiary of the parent established abroad.
The reasons are:
Your business would go much more smoothly if you have a bank account in China. It is difficult and maybe impossible even to have a business bank account in China without having a legal presence there so if you are losing business because your customers are unwilling or unable to pay to a foreign account, then it is worthwhile to set up a company in China for that reason. International payments is a hassle in China (meaning that paperwork is necessary to justify the transfer so it is possible that the payment will be blocked) so your products or service are much more easy to buy if the payment can be done in China. Especially if you are selling B2C you have to take into account that there are many digital payment options in China like Alipay and WeChat pay. But also if you have a B2B business, it is so much easier for your buyers to just do a domestic payment. Also because of the invoice system. The bookkeeping and tax system is based on the existence of formal invoice receipts. There are different categories but basically the admin department will be a lot happier if they have valid so called “fa piaos” – the official stamped tax receipt to justify each payment. If you are a foreign entity you are not able to provide these invoices. So if you are noticing that companies are reluctant to choose fr your company because of the payment overseas, then it may justify to set up a company in China.
The second reason is that it will help your business to have a company on the ground. This company has presence in China and it will have the right license in China. Of course it makes a difference for Chinese clients and suppliers that you are here on the ground in China with a legal entity. There is a license to show, an address to visit and a registration that can be checked with the registers of the governmental authorities. Your Chinese entity is subject to Chinese laws and if needed, legal proceedings can be started in China instead of abroad. That certainly makes a big difference: your company will have a different status and will be much more attractive to do business with (as your company is still related to the parent company who has the reputation).
The third reason is that you want to hire people in China as it is not allowed to employ staff without a legal entity in China. You can explore other options like employing them through a staffing agency or another third party but usually these solutions are not fully compliant with the law which makes your business and employment relationship vulnerable. It is also possible to agree with someone that he/she works as an independent contractor but also this is a risk as in our experience most people prefer a stable employment status with all the protection that comes with that status. With your company you can chop employment agreements and pay social benefits, tax and salaries from your bank account in China. The entire relationship is governed by Chinese law of course as your entity is Chinese and the performed work is done in China. In case of foreign employees, the entity can apply for a work and residence permit for the expat coming from the head office or the locally hired foreigner. Don’t forget that this has consequences for the tax liabilities in China and maybe also abroad.
As mentioned before, you shouldn't chose to set up a company in China too soon because it will demand a lot from you in terms of time to make the decision concerning the incorporation like choosing the location, name, the corporate governance including which persons to appoint in which positions, preparing the legalized documents in the country of the parent company and so on. There are also fees involved for the set up as you will most probably engage a service provider to support you. There are many players in the market with a big variation in fees. Our organization, Equasia and Bonnard Lawson Shanghai are perfectly equipped to support you through the incorporation procedure and are fees are very reasonable, especially since you will get quality service. If you are a start up with a very tight budget and you are located in China already, you can consider to engage a local agent to save costs but make sure you are top of the incorporation process and that you have someone reliable available to help you translate if necessary.
After incorporation, you still have to take into account that you need to spend time to manage and that there are costs involved for the maintenance of the company. I will tell you more about the incorporation process in another episode. I hope this was helpful for your decision making. Don't forget that you can always reach out to me if you have more questions. Always happy to talk about this!
