Pondering Expansion to China? 3 Entity Options to Consider

If expansion to China is on your mind, good news: The Chinese economy is expected to become the world’s largest by 2020. The not-so-good news is that, even if you’re interested in simply exploring the Chinese market prior to making a long-term commitment, you may need to set up a legal presence.

The country is seeking more foreign investment dollars, but strict rules for nonlocal companies make getting into China a complex and time-consuming process. The country is ranked 91st on the World Bank’s Ease of Doing Business report, and is in 151st place for ease of actually starting up a business.

The bottom line: A legal entity may be required for your operations in country and Chinese law does not make it particularly easy for foreign investors to get started. What does this mean for companies trying to break into the Chinese market? Plan ahead, allow ample time and consider one of the following options for China entity setup:

Representative Office

A representative office allows a company to establish a minimal presence in China, acting as a “liaison” office in country to assess market opportunities. ROs are an easy way for foreign investors to get started in China because they do not have a minimum investment requirement and have lower maintenance concerns compared to other entity types.

However, ROs are very limited in what they are allowed to do, and may only be suitable  for certain business scenarios. Non-income generating, non-transactional business activities (market research, building relationships with suppliers, etc.) are allowed, but engaging in sales, signing contracts and issuing invoices are generally not permitted. 

Wholly Foreign Owned Enterprise (WFOE)

As the name suggests, a wholly foreign owned enterprise (WFOE) is 100 percent owned by foreign shareholders. This structure permits a foreign organization to do business directly in China while retaining control over the business. It is often utilized by foreign entities that have long-term business objectives in China, and can allow businesses to enter into contracts, hire local employees, conduct research and development, market products and services, issue invoices and receive payments in the local Chinese currency.

While allowing foreign investors more freedom to do business in China, the WFOE isn’t without strict regulations. A minimum investment requirement exists, dependent on the nature of business and the specific locality of operation. Additionally, the government requires that a WFOE articulate a defined business scope from the start and stay within it, unless approval is sought from the local authorities.

Joint Venture 

A joint venture is a partnership between a foreign business and local Chinese company, whereby the parties agree to collaboratively setup a new entity, sharing expenses, assets and revenues. Foreign investors can benefit by working with a partner who is a known quantity in country, has the right government contacts, etc. With unique local knowledge that would take a huge time investment for a foreign company to develop independently, local partners already have the right infrastructure in place. This can help dramatically reduce overall startup costs in China.

This type of setup is not without risk. By working with a partner, a foreign investor is ceding a certain amount of control to a partner. Additionally, if every detail is not thoroughly considered, differing culture and business practices can creep up and cause issues between partnering companies.

China presents some great market opportunities for companies looking to grow overseas, but managing the intricacies of the country’s business regulations can become an expansion headache. Understand the rules that apply to your company so that you can stay one step ahead and avoid major issues for noncompliance.

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