Over the past few years, the fast growing economy has made China the biggest market in the world inmost industries. In addition, because of its low labor cost, China has been considered as the "factory ofthe world" for many years. These two factors, supported by government stimulus plans, have created a land of opportunity for foreign and Chinese entrepreneurs.

Although there are many opportunities for entrepreneurs in China, there are also many entry barriers.We have seen in previous articles, cultural and business behavioral differences between Chinese and foreign entrepreneurs. This is indeed the first barrier that foreigners encounter while doing business in China. In this article, we will see other difficulties more related to establishment of a business in China.

Depending on each project, the path to set up a business in China can be very different. We will use the example of sourcing projects. The first solution is to give the sourcing project to a specialized service company and the second, to have your own sourcing and purchasing team. For the second solution you need toestablish a legal business structure in China.

Legal business structure 

The easiest, fastest and cheapest solution is to establish a Representative Office (RO) in China.Establishing an RO does not mean creating a new company, it is only applicable for existing foreign companies in China. In order to establish an RO, first of all you need to choose a representative officer who can be a foreigner or Chinese. But the safest option is to appoint somebody from your company.

The documents required for registration procedure are usually dependent on the province you are registering in, but they are often related to the registration and bank statement of the mother company and information about the chief representative. ROs cannot generate any revenue, therefore taxation is based on the expenses (office rent, costs, salaries, etc.).

Foreign companies can use their RO to hire Chinese and foreign staff, and carry out work such as market research, canvassing, searching suppliers, etc. Depending on the province where your RO is established, you can hire a limited number of foreign staff (usually five) and hiring Chinese staff must be performed by certified service companies (such as FESCO - Foreign Enterprise Human Resources Service Co.).

These limitations make the scope of activities of ROs very narrow, that is why this type of structure is only suitable for beginning the entrepreneurial adventure in China. For the example of sourcing projects, an RO can be used as far as the purchasing is done directly by foreign companies and goods exported by the suppliers. However if your business is providing services or selling goods to Chinese customers, the structure of an RO cannot be used. In this case you may need to establish a Wholly Foreign-Owned Enterprise (WOFE).

Wholly Foreign-Owned Enterprise 

A WFOE structure follows the same rules as Chinese companies in terms of taxation and labor laws. There is usually a minimum amount of investment required for the establishment of such companies and this amount must be transferred form the country of origin of the entrepreneur. The registration procedure and the amount of capital are highly related to the city or province where you want to establish your company.

In addition, there are a large number of special industrial zones, such as hi-tech zones, free trade zone and industrial clusters, where there are special taxation regulations and registration procedures. Therefore, regarding your business scope, you should find the right place to register your company. Since information access is quite difficult in China, it is highly recommended to consult a professional service provider in order to obtain the right information as fast as possible.

Another solution often used by foreign entrepreneurs is registering a company in Hong Kong.The establishment of a Hong Kong Limited is indeed fast with low cost and you don't need to be resident in Hong Kong. A professional agent can be appointed to be the secretary of your company and handle all the legal procedures.

In addition, it is very important to hire a certified company for the matter of bookkeeping and annual audit of a Hong Kong Limited, but you should know that a good management of legal procedures of Hong Kong companies can be costly.

Choosing the right type of company establishment in China is directly related to your business scope and the province (or city) where you want to set up your company. That is why a preliminary study of the different possibilities is recommended in order to make the right choice, before starting the registration procedures that are often very long and complex. n

Column prepared by Milad Nouri, Managing Director of China Consultants International Limited

www.China-Consultants.biz