What is the Cost of Starting a Business in China?
What is the Cost of Starting a Business in China?
When people consider the cost of starting a business in China, one of the most asked questions is related to registered capital. At the start of a registration process, company owners must indicate the amount of registered capital they will invest into their business. This registered capital can be invested in several tranches spread out over the first few years. Many times, people inquire about the minimum required registered capital they can invest.
This provides us with insights about their (lack of) strategic knowledge towards the company setup in China. Despite the fears that many businesses have, registered capital is not designed to make the life of business owners more difficult. Registered capital can be a great opportunity to invest money into China without paying taxes on the invested amount. When we receive these questions, we often provide the same counter question as our reply: How much would a business owner need to setup a breakeven organization with a healthy cashflow?
To better support your interest in starting a business in China, we will provide some basic figures related to the cost of starting a business in China:
Cost of starting a business in China: The registration
The registration costs of an entity in China, a Wholly Foreign Owned Entity (WFOE) or Joint Venture (JV) for foreigners, differ strongly per service provider. Some local service providers offer very low fees with a smaller time investment put into the preparation of documents and coaching their clients for success post-registration. There are also many international legal firms charging relatively high hourly fees for the setup costs. At 1421, we are in between both outliers, calculating an all-in fee of 44.500 RMB. For this sum we will assist clients with all parts of the process; from selecting a name until opening a bank account, providing all correspondence in English.
Although the costs differ substantially, there are strong indicators of quality that should be kept in mind. Companies offering very short registration timelines are often not completely transparent about the what you need to have a company operational. Company registration takes between 3-9 months, depending on the parent structure, the speed of the client, the understanding of the steps and the local government.
Cost of starting a business in China: Employees
The costs of hiring local employees are different in each region. The average wage for the same profession in Shanghai and Guiyang will be dramatically different. When considering the wage of an employee in a certain area, it is advised to figure out the average wage for the destined area. Foreign employers tend to have unrealistic views on salaries in different professions that can cause them to seriously overpay or vice versa.
Not only the average wage is different, also the taxes are different. Understanding these differences is important when considering different provinces, cities or even districts. The basic rule of thumb regarding the taxes, is a surplus of at least 30% on top of the gross agreed upon salary. This surplus goes to pension, disability, housing fund and other benefits.
Cost of starting a business in China: Office rent
Renting an office in China requires the same level of research as needed to determine wage costs in specific areas of China. The rental prices in Beijing, Shanghai or Shenzhen have been on the rise for the past 30 years and are quite significant. Whereas other area’s in China offer different prices.
There are very small offices available, which almost function as a virtual office. However, the virtual office concept is no longer a legal option we recommend. The challenge with renting an office is that it starts long before you can issue an invoice in China. You are required to have a registered address for the official entity.
Cost of starting a business in China: Bookkeeping
It is very important that once your company is operational, you have a plan in place to manage the bookkeeping requirements in China. The chance is very high that the systems you use in the West are not compliant in China. It is recommended that you hire an external company you trust with handling your books and explaining the requirements of China to you. Bookkeeping errors can lead to serious consequences for businesses that are not careful.
Similar to the costs of registering an entity in China, the fees for bookkeeping management vary. Some local parties offer bookkeeping at a very low cost. Other international players charge steep, “international” prices. Selecting a service provider based on the quality and reputation of their work is more important than selecting based on price since your bookkeeping must comply with Chinese regulations.
Overall basic costs of a Chinese company
It is hard to provide a detailed overview of all costs involved when starting a business in China. There are many specific details connected to the type of company you look to setup. The location, the number of employees needed, the type of business and the strategic choices you are looking to make will all have an impact on the costs involved in your company setup.
The combined costs of bookkeeping, office rent and an employee will be at least 500.000 RMB per year. If you need two full years before you can break even as an organization, you might want to consider starting your estimation at 1.000.000 RMB for the registered capital of your WFOE.
Are you interested in setting up an entity in China? Do you wish to understand more about your costs in China? We offer a free consultation, to provide insights in your costs involved in starting a business in China.
Michael got acquainted with China when his sister was adopted in 1996. His first trip to China was in 2008, visiting the Olympics and his parents, who live in Beijing. In 2011 Michael joined the team of 1421 Consulting Group, as Business Development Manager Europe. He has helped to establish 1421 Consulting Group in the international market as a respected consultancy assisting western companies doing business with China. Since October he became the group CEO.
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”.