Picking the Right Chinese Business Structure

by | July 8, 2016

Picking the Right Chinese Business Structure

by | July 8, 2016

Strategically selecting the right Chinese business structure is like running the 100-meter hurdles. Every couple of strides you come across an obstacle. This is the most confusing moment for entrepreneurs who want to do business in China. Often, at this particular moment, western entrepreneurs get in touch with external experts or consultants to get answers to questions like: “Can I work from a holding company in Hong Kong?” “Do I have a partner to work?” “Can’t I do anything better myself?” In short, many hurdles to think about.

What complicates this specific stage even more is that many experts tell different stories about what to do. Some experts are convinced you have to work with local partners. Other experts agree that you should always maintain control over your business in China. The opinions are even more divided regarding potential “offshore” structures via Hong Kong, Macao or Singapore.

Yet, all these consultants have two things in common: 1. They are all right 2. They are all wrong. Choosing your Chinese business structure, the type of holding you register, depends on many different factors, for example; the market in which you operate, the operations you want to perform in China, the strategic choices you want to make and the opportunities you have.

 

Four types of industries

It all starts with the market in which you operate. The Chinese government has roughly identified four different types of industries: normal, encouraged, prohibited and restricted industries. When you are part of the first two industries, you have plenty of choices in terms of the type of enterprise you can register. If you operate in a restricted industry, then China is completely out of bounds. When you are active in a limited industry, you are often required to work with a local partner. A Joint Venture (JV) is, in this case, the only option.

 

Three types of companies

The next strategic hurdle that you have to take is all about what you want to pursue in China. There are three types of foreign invested enterprises: A Wholly Foreign Owned Entity (WFOE), the previously indicated Joint Venture and a Representative Office (RO). If you intend to issue and pay invoices to your Chinese suppliers and/or clients, an RO is not an option. An RO is a structure solely intended to employ people in China. The Chinese government is very strict in approving RO’s due to abuse in the past by many Western people, in which they used the structure of an RO to arrange a residence permit for themselves.

Furthermore, a JV and a WFOE are very similar in company structure and requirements. Both registration procedures take about the same amount of time. To register a WFOE or JV, you have to calculate at least 3 to 6 months. The big difference between the two is the ownership. A WFOE is entirely owned by the foreigner (Westerner). A JV is a joined effort with a local Chinese party.

 

Hong Kong Limited

A Hong Kong Limited structure (HK Ltd.) has not yet been addressed. This type of business is, in itself, useless in China as you cannot work in China and invoicing Chinese clients can also be challenging. Not all mainland Chinese companies can issue payments to Hong Kong. The main practicality of a HK Ltd. is its convenience. Following the registration of your HK Ltd., it is easier to set up an entity in China. If you register your Chinese organization directly under a Western holding company, many notarial documents will have to be legalized in the country of origin and sent to China. Due to agreements between Hong Kong and China, company registry documents are alike. Therefore, a HK Ltd. is much more convenient as a holding company. In addition, a HK Ltd. can provide certain tax benefits.

 

Other structures into China

The third and final hurdle has a major influence on your type of venture in China. What are your limitations as a company? Do you have the money, time and energy to focus on the setup of a new business? Because running a company in China costs a lot of time, energy and money. If you lack one of these resources then you might want to refrain from setting up a Chinese business structure. Perhaps then collaborating with a distributor or agent is a more cost efficient structure.

 

What do you want?

The most important question boils down to what you actually want. Do you want to keep maximum control? Do you want to cooperate more intensely with your supplier? Do you want to protect your patents? Sometimes the Chinese market requires flexibility regarding your own wishes, but it is important to never lose sight of your own desires.

By taking all the elements described into account you create the best chance of setting up a successful Chinese business structure, which is tailored to the company, the market, the possibilities and your wishes. However, keep in mind the following; running a business in China is like a marathon of hurdles, it does not end after 100 meters.

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What happened in the year 1421?

From 1421 to 1423, during the Ming Dynasty of China under Emperor Zhu Di (朱棣) the fleets of Admiral Zheng He (鄭和), commanded by the Chinese captains, discovered Australia, New Zealand, the Americas, Antarctica, the Northeast Passage; and circumnavigated Greenland.

Due to this endeavour we can conclude that “1421 is the year that the Chinese discover the world”.