The Essentials of Company Set-up in China

Company Incorporation 组成公司 [zǔchénggōngsī]  David Petersson 潘德伟Successfully setting up a company in China requires knowledge and planning in a number of areas. These will be different depending on if you wish to source products or services from China or plan to market and sell your own products and services on the Chinese market.

Here are the essentials:

1. There are a number of different legal entities to consider. Your presence may be in the form of a Wholly Owned Foreign Enterprise (WOFE), a contractual or equity joint venture, through representative office or representation by a third party (a local representation-service company).

2. Before you establish your presence, you need to consider and define your business scope. The China National Development and Reform Commission (http://en.ndrc.gov.cn/) may encourage, permit or prohibit your business based on your intended scope and categorization. It is advised you consult how to approach this to get the most favourable deal. Different treatments could be related to the physical location of your business.

3. Some areas offer preferential policies in terms of land leasing or procurement, recruitment of staff and management, tax breaks and other incentives. Even within a place like Shanghai, there could be different benefits depending on your intended location.

4. The required minimum registered capital can differ from place to place and is decided by the local Industry and Commerce Administration (http://www.saic.gov.cn/english/) based on your intended business and operation scale. Again, it is well worth asking around for the best deal depending on your intended or available financial resources.

5. Consider the integration of commercial clauses in the Articles of Association before submitting your business licence registration in order to be able to maximize the repatriation of any profits to your Head Offices.

6. If you intend to enter into a joint venture or purchase a local company of decent size then it is well advised to employ a consultancy firm such as KPMG to help you with a thorough analysis of the target company. They can perform due diligence beyond financial accounts and point out issues in the supply chain, employee status and ownership issues.

7. The 2007 Law of Labour specifies issues on employment contract, redundancies, retirements, etc. It is vital that you have preliminary knowledge of this law before you enter so as to plan for employee cost budgets. Things to consider could be the cost of employee contract termination and mandatory employee welfare and benefits. If you intend to enter into a JV or purchase a Chinese company, the labour related due diligence is very important.

8. Develop a comprehensive local employee management system that could help you recruit and manage your staff. A sound and robust employee management system will encourage the engagement and commitment of local staff and avoid potential risks. You may include reporting and communication policies, staff training, performance assessment, remuneration, career management and your employee management manual in the system.

Having the personal experience of setting up a business from scratch, I would advice a foreign company that wish to enter China to either employ a well versed, bi-lingual and trusted person to handle this. Alternatively, engage a competent consultant to manage this complex and time consuming process to avoid potential pitfalls.

6 comments to The Essentials of Company Set-up in China

  • Dan

    Nice blog and nice list. I would add one thing to this list though: registering your intellectual property. This is truly one of those things that should be done sooner, rather than later and there is no better time than during start up.

  • David Petersson

    Hi Dan,

    Yes, it is a valid point and it should be done early to avoid the first-to-file situation.

    In my experience, IP registration would not necessarily protect ones products from being counterfeited and actually going after (stopping, closing down or suing and receiving compensation) a counterfeiter is a difficult, expensive, long and uncertain process. Would you say it has improved in the last few years and will it become easier in the future?

    Some product and service developers would say it is better to just keep innovating and bring out new product designs and in this way always be one step ahead of the counterfeiters.

    David

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  • Wang Keng Seng

    Dear David,
    I have benefited from reading your website.
    I am an adjunct lecturer from Singapore teaching in some chinese university for british degree program.
    I am a Singapore born Chinese and have a master of strategic marketing for Curtin University, B. com from curtin, tesol, cim & several others qualifications.
    Hope to network with you.
    Yours sincerely,
    Wang Keng Seng

    • David Petersson

      Dear Wang Keng Seng,

      Thanks for reading my blog and glad to hear that you find it useful. I will be happy to be connected with you so I looked you up on LinkedIn and added you to my network.

      I hope you have a nice Chinese New Year season in Singapore.

      Regards,

      David

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