The complete procedure to start a company in China
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Note that the procedure we’ll be describing deals with the “Services WFOE”, or a company completely owned by foreigners that deals with services. As far as “Manufacturing WFOE” and Joint-Venture, the procedure is similar (even if some details can differ depending on the specific case).
1. Choose an agency or legal firm that will help and counsel you during the formation process and the running of the company
If you think that you can do it on your own, you’re wrong. Reading this section you’ll see that to open and run a company in China it is necessary to trust a professional that not only speaks Chinese fluently, but is also competent in legal and fiscal matters.
2. Choose the business scope in which you intend to operate and determine if it is encouraged, restricted or prohibited to foreigners
In China there are a industrial sectors in which the government encourages foreign investment (usually by means of fiscal incentives), sectors restricted to foreigners (or in which a foreign partner can only operate by means of a Joint-Venture with a Chinese counterpart, of which you can usually own no more than 49%) and industrial sectors that are completely prohibited, and therefore inaccessible for foreigners.
This information can be consulted online, in the Catalogue for the Guidance of Foreign Investment Industries.
This catalogue is updated periodically. In general, the sectors that are encouraged are those that promote innovations in areas such as environmental protection, export or the development of the poorest regions of the country. Just as an example, in 2015 the elderly care industry became an encouraged sector, probably due to the fact that in China there’s a growing need for that type of service. An example of a restricted sector would be one of the industries that have a negative impact of the environment. Forbidden sectors include those considered politically sensitive, or that can be damaging to the country. Bear in mind that if your industry is not mentioned in the catalogue, that simply means that it is not encouraged, restricted, or prohibited. In this case, the industry is simply defined as “permitted”.
The choice of business scope (or industrial sector) is extremely important.
If you choose a business scope that is too “vast”, the risk that the permit to open the company will be denied increases because the sector in which you wish to operate falls under one of the restricted or prohibited sectors increases proportionately.
If, on the contrary, you choose a business scope that is too “limited” (or too “specific”), your application will probably be approved but, later, you run the risk that the government will force you to close the company because you’re operating outside the scope that you declared at the time of starting the company.
Complicated? I’ll explain with an example. The business scope in which it is easiest to operate is “consulting”: obtaining the permits is easier and the cost and time needed to form the company is without a doubt less.
This is why many agencies specializing in helping foreigners open their own company will suggest that you open a consulting firm even if, in reality, you want to do something completely different (such as manufacturing and/or selling products in China).
The problem is that, as I already said, as soon as the local government realizes that you’re operating outside of your scope (“consulting”, in this case), they’ll force you to close shop. And believe me when I tell you that lately, uncovering foreign companies that operate outside the scope of their business is one of the favorite pastimes of Chinese government officials.
3. Make sure that all foreign investors have the approval to own shares in a Chinese company
As already mentioned, often foreign investors choose to own the Chinese company through a foreign company. In this case, you have to make sure that the foreign company is approved by the Chinese government. For the majority of foreign companies this point is a formality, however it is still important to make sure there aren’t any problems and to provide all necessary documents such as a foreign company business license, a letter of recommendation from the bank in which the foreign company opened an account, and others.
4. Prepare all necessary documents to obtain governmental approval to be able to legally operate in China
To gain permission to start your company and operate in China you must submit the following list of documents (the majority of which must be drafted in Mandarin – another reason why using a professional before proceeding is imperative):
The name of the company, in Chinese, that you plan on using. Bear in mind that, in order to avoid that the name you’ve chosen for your company is already in use or, for some reason, is unusable, you must ask for the name’s pre-approval with the right authorities, that is the AIC (Administration of Industry and Commerce) in the city in which you intend to open the company. This pre-approval may require between 2 to 15 days, depending on where you apply;
The list of controlling partners (or companies) who, as was discussed in the previous section, must also be pre-approved;
The managerial structure, or the names of the board directors, general manager, supervisor and legal representative, which often coincides with one of the directors, and color copies of the passports of all those involved;
The legal address of the company (including the name, email and phone number of the owner of the land or building). Note that the address of the company should be “exclusive” (it’s not possible to share an office with other companies or have a virtual office in order to reduce costs) and “appropriate” to the business scope of your company (for example, if your company deals with manufacturing you can’t register it in an office in the city center, you’ll need suitable space for the type of production you wish to carry out). In addition, note that it is absolutely necessary to present a regular rental contract (or of acquisition).
The Articles of Association (AOA), which contain vital information about the description of the business scope in which you intend to operate (whose importance has already been thoroughly discussed in this article), the managerial structure, the method of returning profits and more;
The number, citizenship, salary and benefits for employees (in case you still don’t know who you’re going to hire, you must then specify the positions for which you intend to hire);
The registered capital (that we already discussed in one of the previous sections of the article) and the total investment (which includes both the registered capital and eventual future “loans” on the part of the company’s investors or third parties, such as a bank);
A feasibility study: a business plan and investment budget (following the standard format provided by the authorities) so as to convince the authorities to approve the opening of the company by the feasibility of your business plan. In the event of the contrary, the project will not be approved. It goes without saying that the registered capital and business scope play a fundamental role in the approval process. If for example you intend to start a cell phones factory, you certainly can’t propose a registered capital of 20,000 USD, which will obviously be insufficient to finance a project of that type. On the contrary, for a consulting company much less will be necessary since that type of business doesn’t require a significant initial investment;
Any other document requested: the list of documents to submit can vary depending on the scope of your business, the city and province of the company (which will depend on the legal address you intend to submit) and the sudden changes to which Chinese law is subject.
As you’ve figured out from this last point, even if the list that I just presented is a great starting point, it is not to be considered an exhaustive list. Again, my advice is to use an agency or legal firm to guide you as to what steps to take according to your situation (business scope, address, etc).
If you don’t have all your documents in order, your application will almost certainly be denied, and after the first denial, getting the necessary permits becomes even more difficult.