The road to setting up a subsidiary in China is not always quick and easy. It takes a significant amount of time, money, and resources to expand your company. You can make the process go more smoothly by understanding China’s various subsidiary laws and regulations.
How to Set up a Subsidiary in China
China has three common business structures for multinational companies:
- Joint venture (JV): As a form of foreign-invested enterprise (FIE), a JV is a partnership between foreign and Chinese investors. These investors share profits, losses, and management duties. Companies who need a local business partner to help with distribution, government relationships, or market knowledge often choose this option.
- Representative office (RO): An RO is the easiest and least expensive option with no registered capital requirements. It has a limited business scope and can only legally do market research, publicity, sales, and service activities within the country.
- Wholly foreign-owned enterprise (WFOE): A WFOE is a limited liability corporation organized and funded by foreign nationals. Businesses who want to produce a parent company’s product in China and export it to a foreign country often choose this option.
The process to set up a subsidiary in China depends on which option you choose.
WFOEs are the most popular business structure for US companies looking to establish a Chinese subsidiary. 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 find a legal representative.
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 foreign investors must retain a PRC entity to act as a sponsor for the company. Because investors cannot directly apply for documents of incorporation, the PRC entity — such as a local designated Foreign Enterprise Service Company (FESCO) — is in charge of the application process.
Benefits of Subsidiary Setup in China
WFOEs have numerous benefits due to their structure as a limited liability company. This structure gives the US parent company greater control over the entire business and helps the company avoids any sticky situations with domestic investors in China, including:
- Profit that is not maximized
- Intellectual property leaks
- Theft of knowledge and expertise
- Setting up the competition
The benefits of subsidiary setup extend to the US 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 US parent company is not responsible 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.
What Do You Need to Set up a Subsidiary in China?
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. Because 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.
Setting up a subsidiary involves several significant costs. The total cost for opening a WFOE is 17,000 RMB. You will also spend a great deal of time traveling back and forth to China during the subsidiary setup process and when hiring employees.
One of the easiest ways to start the process is to work with a global PEO. Globalization Partners is your ideal solution for expanding your business into China. We hire employees on your behalf so that you can get started sooner.
Our employer of record services even take the liability off your shoulders and puts it on ours. Contact us today to learn more.