Depending on who you ask and how they perform their calculations, China is either the first or second largest economy in the world. In either case, China offers a wealth of opportunity for entrepreneurs and established companies seeking to grow their operations abroad.
While the Chinese economy and legal system have made unmatched strides over the past several decades, forming a company and doing business in China are still very different from forming a company and doing business in the United States. From legal formalities and approval requirements to cultural and societal norms, China’s business environment will look very foreign to someone used to the way things are done in the US. That said, once you dig deeper, there are certainly many similarities as well, and making smart decisions about things like mitigating liability and protecting your intellectual property assets requires consideration of many of the same principles in the US, mainland China, and Hong Kong.
Establishing a Business Presence in China
Five Options for Doing Business in China
For foreign nationals seeking to do business in China, there are five primary options available when it comes to establishing a presence on the mainland. Each option has its own unique benefits and limitations, and choosing the right structure for your business requires careful consideration of a wide variety of different factors. These include everything from the nature of your business (your industry) to the relationships you intend to establish, if any, with existing Chinese companies.
The five primary options for establishing a business presence in China are:
- Wholly Foreign-Owned Enterprise (WFOE) – A WFOE is a legal entity formed under the laws of China, similar to a corporation or limited liability company (LLC) registered at the state level in the US. However, foreign-owned companies are prohibited from engaging in certain types of business in China, so you will want to make sure that your proposed business will be legal before going through the process of setting up a WFOE.
- Foreign-Invested Partnership Enterprise (FIPE) – A FIPE is similar in concept to a partnership in the US, and China’s Partnership Enterprise Law contemplates formation of both general partnerships and limited partnerships with foreign investment. The Partnership Enterprise Law also allows for “special” general partnerships for the establishment of law firms, accounting firms, and other professional practices.
- Hong Kong Company – Forming a Hong Kong company has long been viewed as one of the quickest ways to get into business in China. While Hong Kong companies are not recognized as legal entities in mainland China, forming such a company can provide a springboard for investing in China and adding a layer of liability protection for WFOEs.
- Joint Venture – In industries where foreign nationals are restricted from conducting business independently, a joint venture with an existing Chinese entity is the primary way for foreign entrepreneurs and investors to get into business in China.
- Representative Office – If your business’s operations in China will be limited to marketing, market research, quality control, and/or maintaining a contact liaison, you may be able to open a Representative Office in China. Due to their limited operations, Representative Offices are subject to less requirements – though you will need to be sure not to exceed the scope of permissible activity.
Forming a Wholly Foreign-Owned Enterprise (WFOE) in China
In most cases, for entrepreneurs and businesses seeking to tap the Chinese market, the best (and perhaps only) option will be to form a WFOE.
When forming a WFOE, it will often make sense to have the new company be owned by an intermediate investor entity. This entity can be a Hong Kong company (as referenced above), a US entity, or an entity formed in another foreign jurisdiction (for example, a tax haven such as the British Virgin Islands or the Cayman Islands). When applying to form a WFOE, you will need to submit:
- Articles of Incorporation or Organization for the investor entity
- Copies of applicable business licenses
- A Certificate of Good Standing (or equivalent)
- A description of the investor entity’s business activities, along with supporting documentation
- A bank approval letter
Note that Chinese translations for each of these forms of documentation will be required.
Next, you will need to supply the documentation necessary to obtain approval from the Chinese government for your proposed business venture. This is a major differentiator from doing business in the US and other commercialized countries around the globe. In most cases, obtaining approval will require:
- Articles of Association for the WFOE
- A feasibility study and personnel budget (including salary and customary Chinese benefits)
- Copies of real estate leases
The Chinese government may request additional documentation as well.
The third major requirement for forming a WFOE is satisfaction of the minimum capital requirement. The minimum capital requirements vary by business type and scope, and some local jurisdictions have enhanced capital investment requirements as well. For example, if you are planning to open a tech business in Shanghai or Guangzhou, this is generally going to be more expensive (and require proof of greater access to capital) than launching a small agricultural business in one of the more-remote parts of China.
Protecting Your Company’s Intellectual Property in China
Along with establishing a compliant business presence, another top priority for any company seeking to do business in China needs to be proactive protection of its intellectual property. Registration of trademarks, copyrights, and patents in the US does not confer protection abroad (remember when Apple lost its iPhone trademark dispute?) and with filing numbers increasing in China year-over-year, it is critical to act early in seeking to establish and secure your Chinese intellectual property (IP) rights.
Learn more about IP protection, monitoring, and enforcement.
Chinese IP law provides for protection and registration of trademarks, copyrights, patents, and a separate category known as “industrial designs.” Note that, in some instances, disclosure and use can limit your ability to secure protection (particularly with regard to patents), so getting started on the IP protection process is something that companies that are serious about doing business in China need to do sooner rather than later.
Get Ready for an Entirely New World of Business Opportunity
China is truly a unique and special place. While there may be some legal hurdles involved in getting into business, for companies that succeed, opening the doors to China is well worth the investment. The key to success is preparation, and from choosing a business structure to protecting your IP, and even down to researching locations and finding local liaisons who can help you make inroads into the local business communities, the more you can do now, the better.
At Jiah Kim & Associates, we assist entrepreneurs and established companies in all aspects of doing business in China. To get started, contact us today.
Schedule an Initial Consultation at Jiah Kim & Associates
For more information about the steps involved in starting a company and doing business in China, schedule an initial consultation at Jiah Kim & Associates. We represent companies of all sizes and in all locations worldwide. If you are ready to get started, call (646) 389-5065 or use our online tool to schedule an appointment with an experienced attorney today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.