Any company starting a business in China or planning to enter the Chinese market needs to determine the right corporate structure. This decision will have a significant impact on the process of entering the Chinese market, and an accurate choice tailored to the company’s needs can alleviate unnecessary business restrictions and decrease costs.
Thus, the first questions you need to ask yourself are:
- Is it necessary to establish a legal entity in China?
- If so, when is the right time to establish a legal entity in China?
We will address these two commonly asked questions in this post and propose answers that may surprise you.
Company registration in China – Do you really need it?
It is generally assumed that a legal entity involved in capital investment in China must be registered in order to take initial steps to develop a business here, such as examining the market, building business relationships and establishing a local representative. We recommend you start more carefully:
There is no need to rush into setting up a company before you know where your market is, before you assemble a team that can support your business and before you have enough business activity to justify opening a subsidiary in China.
Setting up an entity in China is a major decision that comes with serious liabilities – it takes time, budget and management resources. After it is established, its management poses an even greater challenge and requires specific China management expertise. Deciding to register an entity should come only after a thorough evaluation.
So how to develop your business in China without establishing a legal entity?
Most business activities in China can be accomplished without a local entity by leveraging outsourced services. Operational support companies like PTL Group enable you to handle almost any aspect of your business without setting up a formal entity: recruiting employees, importing goods into China and storing them in a warehouse, collecting payments, invoicing, accounting and reporting, and much more.
Newcomers to China think that the only way to conduct the following activities is by setting up an entity (WFOE – Wholly Foreign Owned Entity), a representative office, or a joint venture. However, this is simply not the case.
You do not need a registered local entity to conduct the following activities:
- Import products into China
- Claim an import VAT refund
- Hire local employees
- Employ foreigners and obtain visas and work permits for them
- Manage HR: salaries, social benefits, expense management, etc.
- Manage Chinese financial requirements
- Sell products and issue RMB VAT invoices (known in Chinese as fapiao)
- Store products in a warehouse or logistics center
- Register a WeChat account
- Set up an E-commerce store and conduct E-commerce activity
At PTL Group, we help international businesses enter the Chinese market by establishing and supporting their on-the-ground operations before formal subsidiaries are registered. Our team helps facilitate employee recruitment, office set-up, financial controls, logistics, warehousing, reselling capabilities, and more. From day one, our clients can invoice, collect RMB payments and sign local purchase and sales contracts.
This allows a critical period of market learning with full operational flexibility before committing to a specific structure, location, business model and partnerships.
The benefits of outsourcing operational services in China
To make it clear that we are not biased, we’ve asked our clients in China to list some of the greatest benefits they have experienced from working with a service provider in China: First and foremost, thanks to utilizing the local service provider’s existing infrastructures and market knowledge, their business became operational from day one. In other words, the time to market got shorter, the copycat risks decreased, and the companies, as they stated, generated revenues right from the beginning. Another benefit, which has proven highly valuable during the Covid-19 crisis, is the ongoing continuous stable operation even during unstable times. When the HQ management couldn’t travel to China, PTL Group’s service teams on the ground could still execute operational tasks on behalf of the company in front of Chinese authorities and clients alike. Read about more benefits of outsourcing operational services in China.
The right time to set up a local company (WFOE)
After gaining some business experience in China, you may realize that it is time to set up your own operation and start taking control and ownership over your activities. These are the signs that will help you identify the right timing to establish your WFOE in China:
- When you benefit from a decent market share and a stable income through your own business.
- When you hire several employees that know your business, have proven to be loyal and professional and are able to take on additional management challenges.
- When you can identify a location where you feel you should have a stronger presence: near your clients, suppliers, competitors, etc.
- When you come across a business activity that requires you to present your own business license and not use a third party’s business license – e.g. government tenders.
- When your products require a complicated license that takes a long time or a lot of money (or both) to obtain, therefore being a waste of time and money to register it under a third party and later transfer to your own WFOE.
- When you want to set up a comprehensive E-commerce structure that requires you to register your own ICP, open your own local bank account and have the appropriate license for payment collection in China and for transferring funds overseas.
Going through the procedure of Company registration in China, you will realize that it is not at all simple and should only come after considering all your options.
What types of entities can be registered in China? What is the process and how can we help you? Contact us for more information.
The PTL Group team