The Pros and Cons of Setting Up a Company in China

Michael MicheliniBlog, Corporate, Incorporation0 Comments

Welcome to Shenzhen, as you’re reading this you must have interest and intrigue to setup a company in China! There are massive opportunities in this magical market. Today I’ll go through some of the mindset and processes you should consider when considering doing it. And yes not just hype, I’ll cover some of the drawbacks as well.

There are many reasons to open a company in China, here are a few:

  • Able to sell in the Chinese market.

    There may be roundabout ways to sell to the Chinese market from overseas. Yet the most direct (and legal) way to sell to the Chinese consumers is with a local company. You can issue them formal receipts (called fapiao) that they can use for their accounting. So they will trust you over someone who only accepts cash and cannot issue a legal receipt. You can open a local bank account with this company and then start to accept payments online. We all are aware of the massive growth in Chinese e-commerce. If you want a piece of this action you’ll need to get a legal structure (company) in place.

  • Able to hire local Chinese staff .

    You can hire some of these amazing, hard working Chinese locals to help you with your business. Whether that is for your future import and export trading business, or a future Chinese e-commerce business, you’ll need staff. Having a Chinese company allows you to hire Chinese local full time for you. Depending on the company type you choose, you can employ them in your company. Then issue them an employee contract and give them insurances and health benefits like other countries. By having this in place, you can attract top talents to work for your company! Many local Chinese prefer working for foreigners, as they get new perspectives and insights as well as learn some new tactics.

  • Get yourself an investment Visa.

    Thinking of sticking around China long term? If you’re the legal representative of the company, you can file for an investment status work visa, and be able to stay in China up to 1 year without needing to exit. You will be able to issue yourself an employee contract and give yourself a salary, and be the go-to boss of your company in China!

  • Open a Chinese website.

    Many people want to have a Chinese website for their business. While you of course can start a website with an overseas web hosting company and have it translated to Chinese, it’s not the best way. To ensure that it is fast and accessible by the local Chinese, it is best to have it hosted inside of China. To setup and host a Chinese website, you’ll need a Chinese company (or a Chinese friend who does it for you in their name – not recommended). This website is to represent what your company’s business license does – you need to stick to the scope of the company you setup. Once the website is setup, you can spread it all over the Chinese internet and Chinese social media.

  • Get an Official Wechat Account (page).

    The first day you arrive to China they’ll tell you to sign up for a mobile app called Wechat. This app has taken China by storm and it is not just for chatting – but also for business. Companies are flocking to the platform to list their company information and products. To get on the bandwagon, you’ll need to have a proper Chinese company setup and go through the verification process. But once you’re in, you can reach the massive user base of Chinese social media enthusiasts on Wechat!

Now that we went through the list of massive benefits of having a Chinese company, now its time we go through some of the drawbacks.

Most of the documentation and business information will be in Chinese language. Even as China becomes more and more open to the Western world, the legal and business documentation you will be signing will be in Chinese. You will have to have a trusted translator (better yet an English speaking lawyer) who can guide you. There will be massive amount of paperwork you will need to sign off on upon opening the company.

Some business categories are not allowed for foreigners. Such industries as media and Internet forbids having foreigners involved. There is a list of restricted industries, and if your dream business falls into one of these, you will have a tough chance to get around the red tape.

  • Need to file monthly .

    Each month you’ll need to declare the receipts of your business and that is best done with a local Chinese accountant. This will cost you around 500 to 2,000 Chinese Yuan per month depending on how many transactions you have – this cost is to pay the Chinese accountant for his/her services.

  • Yearly Filing and Audit.

    As with most businesses anywhere, you will need to file your yearly audit. The cost depends on the amount of activity in the company and how much your accountant charges you, but I would budget at least 2,000 to 4,000 Chinese yuan per year.

  • Need To keep A Company Address.

    Depending on which district in Shenzhen (or any city) you set up in, you will need to keep your address in that district. Even if you want to move from Luo Ho to Nanshan, your company will still need to register in Luo Ho. So either you need to go through a lot of paperwork to change it from one district to another, or you need to maintain a company address in the original district. There are more and more company services to help you with this service, but there are monthly costs for this and it can get redundant if you have an office in another new district.

  • Hard to Close.

    I haven’t been through the process myself (keeping my Chinese company open all these years). But I have heard from friends who want to close their Chinese company it is quite a process. So while it may be getting easier and easier over the years to open a company in China, reports and findings I have read have not convinced me it is getting easier to close one down.

It is a privilege that foreigners can open a company in China without too much hassle and no requirements to have a local Chinese partner. Yet even with this privilege, many opt to work with a Chinese local partner. This is because the business environment is pretty complex and everything is still in Chinese language.

If you are serious about business in China and are here for the long term, I would recommend setting up a company. But at the same time, I wouldn’t recommend rushing into it. Tt is a big investment in time and money. If you are just testing the waters of Chinese business, I’d recommend first working under the radar and getting your confidence level and long term vision clear.

Many first opt in with a Hong Kong limited company that can get them off the ground and running. While that may not allow them to sell and hire in China, it can get the basics of a business underway. Later you can use this Hong Kong company to open the Chinese business. This is good for maintaining the business and dealing with new and old business partners coming in and out of the business.

Hope this is helpful, and as always, it’s best to talk to an accountant and/or lawyer before making big decisions like this. Depending on your specific situation and where your target market and business model will be. Good luck, and most important, be patient! Chinese business is a total different world compared to the West. Most important skill I have learned is to be patient and respectful for the laws and culture here. Resisting it will only speed up your failure. We need to understand we cannot change China and need to play be the rules here to succeed.

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