Company registration in China can be a complex business without a degree of certainty about your chosen path from the outset. It is worth carrying out proper research into the various structures available, their restrictions and benefits, to ensure you are selecting the right format for your fledgling business. You also need to have clarity about the scope and reach of your new business from the start, because once established, some business models can be restrictive in terms of future activities. So what types of company structures are available; and what are their pros and cons?
Types Of Business Registration
When China first opened its doors to foreign investors, the primary model for establishing a presence in the country was the Joint Venture or JV. As the name suggests, this type of business involves a foreign investor partnering up with a mainland Chinese company, allowing both parties to benefit from the other’s experience and expertise. The use of this structure has become less appealing as the years have gone by. This is in part because of the complex financial arrangements resulting from tax law, but mainly due to difficulties that have emerged in protecting intellectual property.
The most popular format for a business started in Mainland China by foreign parties these days is the Wholly Foreign-Owned Enterprise (also known as WFOE or WOFE). The key attraction for business owners is that it does not require the direct involvement of Chinese nationals, therefore, allowing the ownership and day-to-day operations of the company to be controlled entirely by the foreign parties that have established it. It is far easier with this structure to retain control over intellectual property.
However, one drawback to the WFOE structure for company registration in China is that it does require a set level of foreign capital to be invested within the first month of its establishment. This is usually around 15% of the planned total investment; a requirement that may be difficult for a newly-established enterprise to achieve. Plus, you will need to plan for all incurred expenses, from using logistics consultants to employing staff, on top of this. Entry into some business sectors in China, particularly where the Chinese government has large-scale holdings, is also restricted to companies formed as a JV. The media is one such example.
Is The Representative Office A Suitable Structure For Company Registration?
If you’re researching how to register a company in China, you will come across the term ‘Representative Office’ (or Rep Office). It appears to be the easiest and cheapest way to form a company; however, it’s essential to note that a Rep Office does not, in fact, constitute a legal entity. While it allows foreign-registered companies to establish a representative presence in the country, that presence is very much limited.
A Rep Office cannot, for instance, directly employ staff. Nor can it sign contracts, invoice customers, or indeed earn any money: its activities are restricted to acting as a liaison between the foreign country and Mainland China.
Some foreign business owners assume that establishing a Rep Office is a good way to test the water in China before converting to WFOE status. However, this is rarely advantageous. The two forms of company registration are entirely separate and such a move will result in additional expense. Not only will applicants have the cost of setting up a Rep Office, but funds will also be needed to close it down and then form a WFOE. It is usually better to simply form a WFOE in the first place.