The Dangers When Starting a Business in China!
Access to 'the world's factory' and its latest products (at the best prices) is something that is very appealing to those looking at doing business in China, but navigating business on this side is rife with dangers that many who jump in head first fail to avoid until it is too late.
In this blog we will help foreign companies trading in China stay on the side of the law and avoid huge monetary mishaps by pointing out 4 dangers they need to look out for!
1) China Company Formation (and the Mishaps of Choosing the Wrong Business Entity)
One of the great things about starting a business in China is the fact that there are a number of business vehicles one can choose to register, each with their own strengths and weaknesses, set up requirements and so on. Things, however, start to take a turn for the worst when businesses run into legal issues that arise from not registering the appropriate business entity, or when they do not clearly define their business scope in the Articles of Association, or if they do not fully comply with the specified registration requirements. We have written a fair amount of articles on registering each of the various business vehicles one can set up in China, and it is crucial that one knows exactly what they are getting themselves into before committing all their money and resources to it.
What can I do to avoid this danger?
Read the resources below:
WFOE (Wholly Foreign Owned Enterprise)
China WFOE registration: A brief overview
5 careless mistakes foreigners make when setting up a WFOE in China
China Representative Office
What is a representative office in China?
How to set up a WFOE in China from a China rep office
China Joint Venture
The pros and cons of embarking on a joint venture in China's PRD
Shenzhen Qianhai Company
Qianhai company set up: What is Shenzhen's Qianhai zone? Why go there?
Hong Kong Company
Why Hong Kong company formation could be the key to avoid China litigation
Hong Kong company formation: Why bother?
Want to see how all of these companies stack up against each other?
2) You Are Dealing With the Factory Directly! or Are You?
When it comes to sourcing products from China, it is of the utmost importance that traders establish with whom they are dealing with! A lot of trading companies pose as the manufacturers themselves to ensure you that you are getting the best deal available, when in fact they have added a healthy markup on top for themselves. Not only does this stop one from getting a competitive deal, but if there is a breach of contract due to shoddy quality or not fulfilling the order, it is a whole lot more difficult to get justice as many trading companies do not keep substantial assets on hand.
What can I do to avoid this danger?
The important thing is to do your research in ensuring that the people you are dealing with are in fact a legal business entity, and that they have the appropriate licenses to conduct business in China. Start your search online, check to see where your potential partners have an online presence, ask to see their business licenses, set up Skype calls to discuss finer details and make the effort to go and see their factory premises.
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3) Register Your Trademark Before Someone Else Beats You to It!
If you are working with a factory on this side that is helping you to manufacture your own products or components it is critical that you protect your brand's interests by registering your trademark. China trademark registration is based on a 'got there first' basis, and as such many foreign companies fall victim to trademark/IP theft. Many foreign companies also incorrectly assume that simply registering their trademark in their own country means that they are safe even after starting a business in China, but this can not be further from the truth. It is up to you to ensure that your trademark is registered both in your own country and in China!
What can I do to avoid this danger?
Download your FREE copy of "An Introduction To China Trademark Registration" where we explain why and how to protect your trademarks when doing business in China.
4) The Devils Hiding In Chinese Contracts
Drawing up a contract is certainly an important part of helping to protect one's interests in China, but as to how far the contract will go to protect them is a whole different story. Many contracts that are drawn up lack enforcability due to the fact that they are not specific enough. Whilst terms may imply certain things where you come from, or in your language, the same may not hold up in a Chinese court of law.
What can I do to avoid this danger?
Do absolutely everything you can to ensure that you draw up an enforceable contract to help protect yourself! Make sure that the contract is in Chinese and that is applies Chinese law. Don't generalize contract terms, be very specific to ensure that the contract is as iron clad as possible.
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Takeaways
Foreign companies trading in China absolutely need to:
- Establish the appropriate business entity in China, comply with its registration requirements and clearly define its business scope
- Do thorough research on their potential partners online, ask them to provide a copy of their business license, registration documents and tax statements for a period of one year to ensure that they are a legal entity, make the trip out to their factory
- Research their trademark in the SAIC database, register their trademark and re-register it before it expires
- Draw up an enforceable contract that leaves no room for generalization, make sure that the contract is in both English and Chinese and that is applies Chinese law
How do you feel about starting a business in China? Do you have any specific concerns? Have you already registered trademarks abroad?
Let us know your questions or comments by leaving them below.
