Setting up a subsidiary in China is not always quick and easy. It takes significant time, money, and resources to incorporate and grow your company. You can streamline the process by understanding China’s various subsidiary laws and regulations.
How to set up a China subsidiary
China has various types of business structures for multinational companies; however, these are the 3 most common:
- Joint venture (JV): A JV is a partnership between international investors and investors in China. These investors share profits, losses, and management duties. Companies that need a local business partner to help with distribution, government relationships, or market knowledge often choose this option.
- Representative office (RO): An RO is probably the easiest and least expensive option with no registered capital requirements. However, it has a limited business scope and there are only specific activities that an RO can legally perform within the country.
- Wholly foreign-owned enterprise (WFOE): A WFOE is a limited liability corporation organized and funded by entities outside China. Businesses that want to produce a parent company’s product in China and export it to another country often choose this option.
The process to set up a subsidiary in China depends on which option you choose.
WFOEs are typically the most popular business structure for international companies looking to establish a subsidiary in China. To set up a WFOE, you’ll need to prepare all legal documents — including articles of incorporation, audit reports, and letters of authorization — open bank accounts in China, and you will probably need to find a local legal representative for your company.
China subsidiary laws
Although WFOEs generally do not require any minimum registered capital, specific industries may still need to meet these requirements. China subsidiary laws, including the minimum registered capital requirement also vary by city.
All international investors might need a China entity to act as a sponsor for the company. Because investors cannot directly apply for documents of incorporation, the China entity — such as a local designated Foreign Enterprise Service Company (FESCO) — would be in charge of the application process.
Benefits of setting up a China subsidiary
WFOEs have numerous benefits due to their structure. This structure gives the parent company greater control over the entire business and helps the company avoid any sticky situations with domestic investors in China, including:
- Profit that is not maximized
- Intellectual property leaks
- Theft of knowledge and expertise
The benefits of subsidiary setup extend to the parent company. As a subsidiary, the company in China can operate independently, which means that managers can choose their own business style to match China’s culture and differing needs. Subsidiaries also carry their own liability, so the parent company is typically not liable for any litigation, compliance issues, or other problems with the subsidiary.
WFOEs also have greater flexibility than other corporate structures. These subsidiaries can use local currency and directly control all day-to-day operations. They often operate under a higher degree of efficiency than JVs or ROs.
Other important considerations
The China subsidiary setup process takes a significant amount of time and money when handled on your own. From start to finish, it can take months to incorporate your business and begin operations successfully. Since you cannot hire employees until you have officially set up the subsidiary, some employers lose talented candidates who cannot afford to wait around for a job.
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