And now for something entirely practical. Wholly owned foreign entities (WOFEs) are the vehicle of choice for most people and companies doing business in China. It is less complex than a joint venture (JV) and allows you to concentrate on what your employees are up to as opposed to your partners.
This post is informational in nature. It is strongly suggested that if you intend to open a WOFE in China that you get a good lawyer who is in China, knows the laws and preferably, is licensed to practice in China. U.S. lawyers are fine if you need guidance on issues like U.S. tax and structuring, but more than likely they will farm out the incorporation work and charge you a fee for reviewing it.
As always, check and recheck any referrals you get, China's corporate laws are 30 years new and local government officials struggle to keep up, so interpretation can be variable.
A knowledgeable local lawyer is the best choice. Do not fall into the trap of assuming that a big city lawyer, for instance from Beijing or Shanghai, understands the conditions outside their respective city's. Finding the right lawyer is another subject.
Foreign invested enterprises (FIEs) in China have their own set of laws and what they do not cover, is governed by the provisions of the Chinese Company Law, last updated in 2006. The laws are national, so in theory they apply everywhere, but there are important local considerations like interpretation, capital requirements and ease of administration which should be considered.
Location
Location is very important. You have to set up your business where you have your main office, if you set up another part of your business somewhere else, you will have to register your company in the new area as well. Selecting a location is part art, part science. The art is first figuring out where you will be welcome; municipalities in different regions are at different stages in terms of economic development and will react differently. An advanced city like Kunshan is not interested in water intensive or high ecological impact industries, but there are cities in the west where they would welcome you with open arms and economic development incentives. On the science side you also have to apply the usual matrix of factors, logistics, material availability, labor costs, cost of compliance, taxes etc. that you would use in any location decision.
There are a fair number of companies that are changing their incorporation due to poorly planned initial decisions. The usual story is we incorporated in Beijing/Shanghai, because that was our first base of operations and now we are moving to be more logically connected to our operations. Be aware that Chinese cities are every bit as competitive as ours are to attract company headquarters, and as usual, the bigger the company the better; and like the United States, the bigger the city, the more bureaucracy. Unfortunately, small cities can also have their moments.
The legal stuff
Your attorney will help you with some of the mundane tasks like making sure the business you want to do in China is permitted. Some industries are government only, others are limited to Chinese. While many of the older restrictions are going away, assume nothing. They will also help you establish your bona fides as a legal, financially responsible corporate entity in your home jurisdiction. The types of documents you will need to provide include:
Articles of incorporation or equivalent (certified copy).
Business licenses, if required .
Certificate of Status, (Original can be obtained from the Department of Financial Institutions).
Bank Letter of recommendation stating length of relationship, average balances over the last two years, current balance and general credit worthiness (signed original).
Description of existing and planned business activities, annual reports, marketing materials, brochures, news clippings etc.
Your lawyer will also help you draft your proposed articles of association, which needs to set out the management structure and capitalization of the business. The articles have to be complete down to the names and powers of your managers and directors, the authorized legal representative (person who holds and is authorized to use the Chop, (company seal), which is required for all official company business), local business address and copies of all proposed leases. It is highly advisable to refrain from entering into a lease until you have all your approvals in order otherwise you could be paying for space you are not allowed to use. Landlords are used to signing proposed leases so it will not be an issue. Until everything is approved, use residential serviced apartments or hotels, if necessary, to do your work.
All letters, the articles of incorporation and the business plan should be presented in English and translated into Chinese, certificates, licenses, reports and descriptive materials can be summarized.
Minimum capital requirement
The United States used to require minimum capital to ensure financial responsibility in its early years, but gradually abandoned the practice. The Chinese have not, probably due to the risks posed by undercapitalized companies and the immaturity of their enforcement mechanisms. You will be required to show a minimum investment in terms of cash or other acceptable value, machinery and IP work, but you need to be careful about timing and valuations.
Part of your capitalization requirement will be related to employment and you will be required to provide a business plan which shows intended hires, their salaries and required benefits which can range between 32 to 42 percent of the base salary, not including taxes. Many FIEs have found out the hard way, you will be held to a strict standard. FIEs often make the mistake of believing that, because they see Chinese companies playing fast and loose with their benefits and tax payments, they can.
The Chinese perspective on WOFEs
The Chinese approach to reviewing an application for incorporation is conservative. They want to make sure if anything goes wrong there is enough money to pay the employees and take care of any legal obligations. You are a foreigner. They see no reason why local people should shoulder the risk and cost of chasing you back to your home if something goes wrong. They will look very carefully at the type of business, its risks and your experience in determining your minimum capital requirement.
Be aware, the business approval and the incorporation are inextricably linked, if one fails so does the other. They have the discretion to look at all aspects and structure of the business and can either use the capitalization as a blocking issue or simply reject the application if they think it's not feasible. Note the earlier suggestion that you go places and incorporate where you will be welcome.
It can take anywhere from a couple of weeks to six months or more to go through the approval process, larger cities take longer generally, but as with everything, it depends. Complex or large projects will take more time if their project involves multiple regulatory approvals. Remember, this is the time to make sure you get everything you need to do business. This is the one moment in time that you hold most of the cards. Local government officials are graded on their ability to bring in investment, but once it's in they figure they have you. Do not make the mistake of rushing your approval; use the time to negotiate for what you need. Fees will be about 1% of the required capital.
