There are many attractions for starting a business in China, such as low manufacturing costs, plentiful infrastructure, billions of potential customers, and a fast-paced and vibrant working environment where there is plenty of money to be made.
The most popular and beneficial company type that foreign businesses open to take advantage of this amazing market and economy is a 'Wholly Foreign Owned Enterprise," but now you will most likely be wondering: "OK, but how much does it cost to open a WFOE in China, and what are the benefits?"
Buckle up as we answer these questions in this blog post...
So You're Thinking Of Starting A Business In China?
Of course, foreign companies can't just waltz into China and set up shop. They need to register a legitimate company, and by far the most popular company type for foreign businesses today is the 'Wholly Foreign Owned Enterprise,' or WFOE for short.
But what makes this kind of company so unique, and if it is indeed the correct company type for you, why choose it?
What Is A WFOE?
The 'Wholly Foreign Owned Enterprise” (commonly named a WOFE as an alternative acronym) is a limited company that allows foreign businesses to run a company in China which:
- Is legal.
- Can hire & fire both foreign and local staff.
- Is independent with no need for local partners or Chinese meddling.
- Can invoice in CNY.
- Can provide customers official invoices (fapiao).
- Can transfer profits outside China in USD.
- Can transfer profits outside China in USD.
- Has more control over valuable Intellectual Property.
- Retains ALL profits.
These are all benefits provided to local companies, but the difference is that in the past most foreign companies would have to enter into a joint venture with a local partner, as this was how China protected its interests while building up its knowledge and ability.
Times have moved on, and now foreigners are permitted to set up a company where they have absolute control. Of course, they must still pay tax and social insurance payments, as these are a normal obligation to the Chinese government that every company has, but beyond that, they answer to no one.
What's YOUR Ideal Wholly Foreign Owned Enterprise?
This company type gives autonomy in China, but anyone who has been here will tell you that China loves its pigeonholes, and it's no different in the case of this company type.
There are typically three categories that foreign companies' new China outfit will fit into:
3. Consulting (service)
Once your scope of business is decided that is set in stone, although some wiggle-room is often allowed for minor side-projects that do not strictly fit under the announced scope of work.
For instance, a manufacturer who also offered QC consulting on a limited basis besides their primary work of manufacturing products could well find that local authorities would accept this with no change required to their business.
Were you to decide to change your business's main thrust of work entirely, you would need to re-apply for your WFOE all over again.
How Much Does It Cost To Open A WFOE In China?
So you've decided that this kind of company sounds perfect for starting a business in China. Great!
Now let's tackle the important question, which is that of setup costs.
There are 2 cost centres when it comes to opening your WOFE.
- Setup costs
- Registered capital
You essentially have four options. Your choice will depend on how deep your pockets are and, more importantly, how much you value having a good job done.
1. International Law Firm
Large international law firms offer a premium business incorporation service.
You can expect 5-star service, staff that speaks different languages, and total professionalism.
The job will be done correctly and to the letter including helping you find an office, as these large firms have been around for many years and are well versed in setting up companies in all areas of China.
Their costs can be high. The amount that you would have to pay may be as much as RMB100,000 for each company that you wish to incorporate in China. While this covers everything, the high cost makes it prohibitive for many SMEs.
You may also face a situation where the international firm’s representatives aren't as 'hands-on' as a smaller firm's employees. You may not be kept informed of the progress due to the sheer number of clients they're handling at any one time. Some people prefer to keep close tabs on their project, so an international law firm may not be the best choice.
2. Mid-Size Local China Business Services Provider
This is where Hongda Business Services is placed, as we're a typical example of a mid-size local Chinese business services provider who has been around for a decade or longer.
Their role is to offer the same services as the international law firms, but at much more affordable prices, catering to everyone from SMEs up to global companies looking to set up a branch.
You can expect excellent service, hands-on representatives, and good local experience which helps them to speak to the appropriate people in the right offices and decrease incorporation times. They can also easily help you to find an office in which to base your company.
Whereas we cover Shenzhen, Guangdong province's PRD's other cities, and Hong Kong, other companies in different parts of China offer similar services for their respective areas.
Typically, setting up a WFOE in China with this type of firm will cost around RMB10-20,000.
Unlike large international firms, these companies care about and need your business, and so are likely to make a great effort to please clients at every turn.
Languages other than English may not be offered.
The high level of professionalism offered by the international law firms probably won't be as stringently followed, but by Chinese standards, it should be good.
3. Sole Trading China Business 'Expert'
Often staff who have worked for a mid-size firm in China will decide that they are going to go it alone.
Some of these people are very capable of providing a decent level of service as they have been in the industry for a long time.
Typically they'd try to offer bargain basement prices for company setup. These could be in the range of around RMB10,000 or less.
There is no guarantee that you will get good service as relying on one individual is always risky.
What you are sold may not be the facts. They may say that they can set up your kind of company, but it may be that they have never done this before and make mistakes during the incorporation period costing you time, money, and good standing with the local government of the city you wish to operate in.
They may not have much ability to help you locate a suitable office.
They will often be swamped with work and may not be able to give you the level of attention that you require.
You can always set up your own WFOE in China. That's no secret.
This is probably the lowest cost option and would come in at under RMB10,000.
The process is going to be a nightmare for 99% of foreign companies due to:
- The paperwork and discussions being entirely in Chinese.
- The need to enter into dialogue with local government officials.
- Copious amounts of paperwork.
- No assistance is given by the authorities, leaving much guesswork for the uninitiated.
- Confusion about where to go to submit various paperwork, as there are several government offices involved.
- You need to find your own office and negotiate its contract with the local landlord.
Do you need to pay international prices to set up your company? Certainly not. But when you start looking for the cheapest option, you will soon find that what sounded like a bargain at the time will cost more later.
At the end of the day, you get what you pay for. By cutting corners on something as important as setting up your company correctly, you may well cause yourself unnecessary stress and delays in starting your business in China. You may also have to incur additional costs to re-submit and re-apply for specific steps in the process, and you may even lose your good standing with the local authorities.
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On we go to the second cost centre for foreign companies aiming to open a company in China: Registered capital.
It's not in China's interest to let foreign businesses open a company if they aren't sure that there is sufficient capital in place to keep it running, create jobs, and pay staff on time. This is why the government usually insists on an amount of registered capital being committed to any new WFOE incorporation.
Depending on which industry you're in, you're likely to be required to provide the following registered capital levels:
- Manufacturing: 1,000,000 RMB
- Trading: 500,000 to 1,000,000 RMB
- Consulting: 100,000 to 500,000 RMB
This may not be required 'at once,' and often the authorities will put a time limit on when the amount needs to be invested in China, for instance, within one year. This gives new companies time to build up funds in a Chinese bank account, although this allowance is less likely in fields like manufacturing where many jobs are riding on the employer, and the investment acts as a 'safety net' for their salaries were the company to hit a rocky patch.
Also in some regions of China, the local governments don't insist on any registered capital at all in a move that is meant to level the playing field between foreign companies and their local counterparts who don't have to provide it. The thinking behind this is that it may spur more job creation by encouraging ever more foreign companies to set up businesses in China, even smaller ones.
Rounding Up The Costs
Foreign companies could pay as much as RMB100,000 to set up their WFOE if they use an international law firm, but this is seriously overkill for most organisations!
Typically you can have your WFOE set up by a professional outfit for around RMB10-20,000, and this will get you speed, security, and excellent local knowledge. You'll also be aware of the exact amount of registered capital that you will need to put up as the local China business services provider will know your area's requirements.
Cutting corners and trying to save a meagre RMB5,000 or so here and there is likely to cause far more stress and hassle than it's worth.
Don't forget - Setting up the WFOE is not the end of the story. You will still need bookkeeping, accounting, work permits for foreign staff, and perhaps you would also need to register trademarks (amongst other things) before your new company can trade legally and be compliant.
While dropping huge bundles of cash on just opening your business in China is not a good use of money, relying on trusted local experts to set up WFOEs cheaply, quickly, and correctly, is a good use of funds, especially when costs are typically affordable.
Are you interested in starting a business in China? Does a Wholly Foreign Owned Enterprise sound like it's the right option for your business? What kind of budget do you have to open your China company? Let us know your comments below please.