How Does A Foreigner Set Up A Startup In China?
If you are an entrepreneur and you are thinking of doing business in China, then maybe setting up your company in Mainland China is the way forward. But is it a viable option?
Recently I spoke to two entrepreneurs to get their thoughts on the subject. Both have education startups, but have gone down different paths.
Entrepreneur Santiago Ospina talked to me about his new business www.YuYanCloud.com. Santiago explained that his core customers come from China, but because of a lack of knowledge he decided to set up his business in the USA.
If he had more information about 1) how to set up a business in China as a foreigner and 2) what benefits his business would get from being based in China then he would have gone down this route.
The first question I asked Santiago was, why China? His answer was straightforward:
"China is the new Wild West. If you find that piece of gold you can strike it big!"
Entrepreneur Jordan Miles is based in China. I got his insights as he is currently in the process of setting up his company as a Wholly Owned Foreign Enterprise.
After my chats with Santiago and Jordan, I set out to find the answers to some of their questions. Below are the results of their insights and my research.
How to set up a business as a foreigner in China
There is a specific process that you have to go through if you want to set up a business in China. It can be roughly broken down into 10 steps. There is also a specific set of documents that you will need.
The costs and timeframe are important considerations too. These vary by the region in China and also by the industry that the business is in.
As a guideline it’s possible to say that the minimum timeframe is between 60 and 90 days. The minimum capital that has to be invested in the business at the start is around US$20,000.
Below I’ll list the documents needed and the process to go through to set up a Wholly Owned Foreign Enterprise (WOFE) in China.
- Copies of passports or ID cards of all investors in the company
- If the investor is an overseas company, it must provide a company registration certificate
- Two two-inch photos of the executive director
- Telephone number and fax number of the company to be established
- A profile of the new company including details about:
- The field of activities
- Estimated turnover
- Estimated number of staff
- Estimated profit of the new company
- Original copies of the overseas bank references of each investor. This is to prove credit worthiness of the investors
- Original copy of the tenancy agreement of the registered office
It’s very important to note that the original copy of the passport of the individual investor and the original copy of the passport of the executive director will be thoroughly scrutinized by the Chinese Government.
All documents in the process below must be in Chinese.
1. Approval by Development & Reform Commission
To receive the Foreign Project Approval Paper you must submit a feasible business plan, ID of the investors and an environmental assessment.
2. Approval and filing with Foreign Trade & Economic Bureau
To receive the Foreign Business Approval Certificate you must submit the articles of association, the office rental agreement and an audit of the company funds.
3. Registration with Administration of Industry & Commerce
This step requires the documents obtained in steps 1 and 2 above. Once you have submitted these documents you can obtain the Business License.
At this stage you will normally deal with the regional local level agencies. For example, if you wanted to set up the business in Nanjing, you’d deal with the Nanjing Development & Reform Commission.
If the investment were too big then you’d have to go through the provincial level government agencies. Using the previous example, if you wanted to set up the company in Nanjing, then you’d have to deal with the Jiangsu Development & Reform Commission.
4. Obtain Organization & Institution Code Certificate
Now you can use the Business License to obtain the Code Certificate. This document is an important prerequisite for all the following steps and is very rarely translated into English.
5. Make your Company Stamp, Legal Person Stamp, and Company Finance Stamp (for banking)
This can be done at most printing and photocopying stores for around RMB300 (US$50).
The important part to note here is that the printing store has to file their stamp-making activity with the Public Security Bureau. This must be filed along with copies of the Business License and Code Certificate.
6. Obtain Tax Registration Certificate from the Tax Bureau
At this stage you have to deal with two tax bureaus, the Local Tax Bureau and the State Tax Bureau. This should be a one-stop-service, but in reality you’ll have to deal with two different offices.
From this point on you’ll be required to have a Certified Public Bookkeeper.
7. Open a Corporate Bank Account
This will be the bank account for all official business transactions and will therefore be audited by the tax authorities. All sales invoices and receipts must match the transactions that occur through this account.
8. Filing for Registration of Foreign Currency International Remittance with State Administration of Foreign Exchange (your local branch)
This stage is for any companies that need to conduct any business related to remittance internationally.
9. Filing for Registration of Import & Export Goods and Equipment with Chinese Customs
This step is only for companies that need to import production equipment or if you are an Import & Export Company.
It’s important to note that regional customs is not a part of the local government. It is an independent agency under the General Administration of Customs of People’s Republic of China.
10. Lodge application for Favorite Policy or Tax Rebate if you are qualified
This stage is non-transparent. You usually ought to speak to some government agencies or a local finance/tax management firm to find out.
The framework is that your business is in the Encouraged Foreign Investment Industry Category List (available online from Ministry of Commerce and Foreign Trade, MOFCOM) and regional incentives.
The benefits of having your business based in China
There are a number of benefits to having a WOFE in China.
1. Control of your business
By being based in China you are better able to control the needs of the business. For example, by being legally based in China the company is able to hire staff in China. If the company is based outside of China then this is more complicated.
By being a WOFE the business is able to legally use job-posting websites to attract Chinese staff. This means that staff can also receive benefits. Overall this makes the business more attractive to quality staff, improving the company overall.
2. Official company stamps
This may sound superficial, but actually this is really important for a Chinese business. It gives a company gravitas and stature, especially when doing business with other Chinese businesses.
As the process of obtaining an official company stamp is very tight (see above) it gives credence to owning and using one.
3. Visa benefits
As a foreigner you will have to deal with visas to enter and reside in China. If you have a WOFE then a company owner can obtain a visa through the company. This can either be a business visa or a resident permit.
The politics to consider
People often complain that it’s so hard for a foreigner to start a business in China. But there are some legitimate reasons for this. Below I’ll point out the most significant ones.
1. The visa game
As I just pointed out, one of the main benefits to setting up a WOFE is the fact that a foreigner can use the company to obtain a visa instead of having to find a different method to get legal status in China.
The most significant reason to make the process as difficult as possible is to prevent an abuse of the visa system. For example, a business could be set up and this then used to supply visas very easily to friends and associates of the business owner.
To prevent this happening there is significant bureaucracy to make sure that only legitimate businesses are set up. Only the businesses that will add value to the Chinese economy and are legitimate will pass this stage and rightly so.
2. To prevent a breakdown of trust
Another reason that it may seem difficult for a foreigner to set up a startup is to prevent big companies working with illegitimate small ones and falling foul of the law.
Big firms in China don’t want to be in a position where they might be dealing with illegitimate startups that can then have a damaging affect on the big firm later on.
The bureaucracy and convoluted process is designed to make sure that only WOFEs that have a chance of being successful and of working in a proper way will actually come into being.
image: Robert Scoble Flickr
Have you tried to set up a foreign owned business in China? What problems did you have or what advice would you give to someone trying to do the same? Please leave your comments below.