The creation of a Chinese entity is a crucial step that those willing to do business in China must take very carefully. In fact, due to the particular nature of the country and of its special regulations, the process of forming a company in China is very different from that in use in other jurisdictions around the world. Each phase must be studied and carried out with the utmost attention from the beginning as it is highly prone to errors that could cost dearly later, whether in terms of costs and waste of time, as well as expose to serious liabilities.

When it comes to choosing the right type of business entity to establish in China, there are 3 main options to choose from: 1) a Wholly Foreign-Owned Enterprise (WFOE), 2) the Representative Office (RO), 3 ) the Joint Venture (JV).

Deciding the structure of your Chinese company based just on guts or first impressions is a common but dagerous mistake. In fact, sometimes projects carried out under a RO could be better accomplished using a WFOE for various reasons such as tax efficiency, human resources and other reasons.

In general, the most popular choice is the WFOE.

In this guide we have focused on the process of forming a WFOE in China. If you would like to check the details of a Representative Office and compare them with those of a WFOE, you can refer to another of our guides available at this link.

The term WFOE stands for Wholly Foreign-Owned Enterprise and indicates a limited liability company wholly owned by a foreign investor.

A WFOE can legitimately sell goods and services directly in China, bill customers and receive revenues in RMB. Through a WFOE it is possible to convert corporate profits from RMB to US dollars and transfer them to a parent company (PC) outside of China.

The WFOE can be used to protect the intellectual know-how and technology of a company, as well as to fully recruit and control human resources. In addition, this type of entity ensures greater efficiency in business operations, management and future development.

A WFOE has legal personality.

Once you have chosen the WFOE as the corporate structure of your Chinese company, you can proceed with the actual registration. Here are the main steps to take:

1) Decide the Business Scope of your Company

This is one of the most important decisions you have to make when registering a company in China, as it must include any business you intend to do in the future. This is one of the most important decisions you need to make when registering a company in China, as it must include any business you intend to do in the future. In China it is not possible to register a company for a general business scope and you should not decide to proceed with a scope that could be accepted more easily and quickly, but that wil be different from the real one, otherwise there could be problems in the future, when the business starts. It is therefore better to negotiate a more decent activity scope suited to the real needs of the business.

2) Accurate Location Selection

Picking a location for your company in China is not an easy decision: each city and even their districts may have different requirements related to your business type and structure. These differences may concern factors as the required registered capital, the type of office space needed, corporate tax and incentives, documentation to be provided, etc. In addition, each city has its own KPIs for economic development, so some of them may offer good conditions for attracting foreign investment, while others do not. The same goes for the different neighborhoods within the same city. Many foreign companies choose to register in the so-called Free Trade Zones (FTZ) to take advantage of the benefits offered by these special areas. Click here to learn more about the differences between the various areas of Shanghai in which to set up a WFOE.

3) Choose of a Chinese Name for the Company

When registering a new WFOE it is necessary to choose a Chinese name that best represents the brand and is able to communicate its values. It is not easy to choose the right name for a new company in China, as the authorities reject any name that seems similar to that of existing companies, both visually and in sound. Therefore, it may be necessary to submit a list of more than 20 names in order to obtain the approval of just one of them. Many companies choose a name whose sound or meaning recalls their original name, but which at the same time can be approved.

4) Choice of the Ownership Structure

Various factors should be considered in this choice such as tax efficiency, liability control, brand exposure, ease of management and future planning (for example: the transfer of the entity or the inclusion of new shareholders). Who will own the new company? Should the new WFOE be owned by your parent company, a holding company, an SPV or an individual? These and other questions should be answered when choosing the ownership structure of your company in China.

5) Choice of the Legal Represntative

Before you can begin the business registration process, you must appoint a Legal Representative (LR) and Supervisor. It is important to choose the right person, trustworthy and responsible. The LR is the most important person in your Chinese company as it is the person the company stamps are associated with, the person who shares responsibilities with the owner of the WFOE. You have to make the right choice, for example: a local or a foreigner?

6) Select a suitable Office Space

In our experience this is one the major cause of delays and misunderstandings between applicants and authorities since in many districts of most cities in China, you must have an office lease agreement for at least 12 months before applying for company registration. Both the office (or warehouse, or retail space) and the lease agreement itself must meet specific requirements to be eligible for a company registration.

7) Set the Registered Capital Amount

China does not have a minimum capital requirement set for foreign-owned companies, but there are only general guidelines. Nonetheless, capital requirements can change dramatically depending on the type of company you want to register and also on the business plan. However, for the registration of a WFOE it is required to declare the intended registered capital, which must be approved by the authorities, and that can be paid within 30 years as indicated in your statute.

We suggest that you inject some capital at the beginning anyway, as you will have to incur costs before your WFOE breaks even.

8) Prepare Form and Documents

The list of forms and documents required for registering a new company in China varies depending on the type of company, ownership structure and management type of the parent company. However, it should always be kept in mind that the authorities may at any time request additional documents at their discretion.

9) Sign the Documents in the Right Way

Strange as it may seem, China has very specific requirements on how application forms should be signed, with requests regarding even the type of pen to use. It often happens that applications are delayed due to problems with the signatures of documents: the signature does not correspond perfectly to that on the passport, the type of pen used is wrong, or more simply because the forms are in Chinese and have been signed in the wrong space.

10) Understand the Taxpayers Classification

The Tax Bureau classifies WFOEs according to different thresholds, dividing between small-scale taxpayers or ordinary taxpayers, and applying consequently different levels of taxation. While in some cases companies can choose which class of taxpayers they belong to, many times it is not possible to decide independently, and this depends on the specific activities of the company and its expected financial data. In any case, it is very important to understand the difference between the various classes and the expected tax liabilities.

11) Registration with the SAIC

The most important authority for the registration of a business in China is the SAIC, the State Administration for Industry and Commerce, which has an office in each district. Recently the government has merged the functions of different bodies in one and it has created a unified license, the so called “5 in 1 business license” which includes the main business license, tax registration, organization code, social security and statistical registration.

12) Obtain the Company Chops

In China, the so-called company chops (company seals) are the main instrument of representation of a company, necessary for authenticating all the agreements signed by it. At this point an English name for the WFOE must be assigned, which will appear only on the seals but not on the certificates. The seals carved for the company and its legal representative will be used to validate each document signed by the company.

13) Opening the Bank Accounts

To be able to operate with your new company it is necessary to open at least 2 different bank accounts (usually at the same bank), each of them with a specific function. This stage may need to be carried out in two different phases: one to open the capital contribution account, which is used only for capital injections, and one to open the operative account. Additionally, you may need multiple accounts in order to operate with additional currencies.

To open your bank accounts you will be required to be present in the selected bank and the whole process will be recorded for reference. Although opening the account remotely is theoretically possible, in practice it is a very rare possibility in which case the chances of obtaining the account would be much lower.

14) Register the Tax Account at the Municipal Tax Service

After obtaining the bank accounts, you will have to open the tax account within a month and start filing your tax return, otherwise there is a risk of incurring various fines. To learn more about the different levels of taxation based on business classification, check this article.

15) Additional Licenses Verification

Depending on your business, you may need additional licenses or authorizations for registering a company in China such as import-export licenses, food or alcohol sales, retail, financial services, and so on. There may be errors when choosing a license or understanding its requirements which must be met even before applying for the license. In these cases, you might have to wait up to six months before starting a business like a restaurant or warehouse activities.

16) Registration with other Authorities

According to the nature of your business, additional registration with other authorities may be required. Typical examples of this include registration for VAT, registration for import and export at customs (for trading WFOEs), licensing for food or alcohol, and so on. It is important that these additional registrations are done correctly and that you know what to expect before starting your project. For example, VAT registration requires a dedicated and sealed computer and printer; a food license may require a warehouse, etc.

17) Prepare to Hire Personnel

A WFOE is allowed to hire staff directly just by opening the social security account, the housing fund account and various others. If not properly addressed, the recruitment phase of local staff can lead to very costly mistakes, not only during the start-up phase, but also afterwards. The biggest challenge of hiring in China is not red tape (which can be outsourced), but rather addressing the mindset and expectations of the Chinese workforce.

18) Company Upkeeping

Chinese companies must file monthly and yearly accounts, tax and VAT declarations, auditing, as well as monthly filings about human resources. Once your Chinese entity is ready, you will surely want to focus on developing this fascinating new market and not waste time with periodic registrations, audit reports, tax reconciliations and other red tapes that can simply be entrusted to professional agencies like Chinalyse. We can keep your books and carry out periodic accounting and tax filings and other corporate services, like processing trademark registrations.

Click Here to know more about how Chinalyse can help you to form a company in China!