10 Steps to Starting a Business in China #2

Find office space through a realtor, just as you would back home. Whatever space you choose, though, make sure it is zoned for the type of business you're planning on opening.

3. Choose an entity status

Before you register with the government, you need to decide what type of business entity to register. The most common for foreign businesses are joint ventures, representative offices, and wholly foreign owned enterprises. Each, of course, has its pros and cons.

A joint venture requires a partnership between a foreign business owner and a Chinese citizen. Though joint ventures may sound like the safest route, experts warn against them. Critics say the most common problem with joint ventures is no more than a classic case of "same bed, different dreams" syndrome.

"They fail nine out of 10 times. You're working with someone who's familiar with the territory on their turf, and they will end up with the business," Harris says.

Representative offices are an easy, low-cost way to go, but it drastically limits the scope of what you're allowed to do in China. As Yang says, "A representative office is just there to represent your offshore entity." In other words, you cannot deliver any services or products, which means you also cannot generate revenue. A representative office affords you little more than the ability to show your face and build your brand name.

The most common type of entity, therefore, is a wholly foreign owned enterprise, known as a WFOE. According to Frisbie, "75 percent of American investment in China these days is 100 percent American-owned facilities," because it gives business owners maximum quality control.

Not surprisingly, though, a WFOE is much more complicated to set up. It takes more time to get approval from the government, and it requires a minimal capital investment that you must put in a Chinese bank. Harris says. And, he notes: "That amount can vary greatly depending on the nature of your business and where you're setting it up."


4. Develop a business plan.

A detailed five-year business plan is crucial, because once the government approves it, you will be able to operate only within its guidelines. If you start offering a product or service that is not in your business plan, the Chinese government can shut your business down. The same goes for where and how you operate.

"Make sure your business plan is as broad as possible to allow the company to operate freely," says Collins. "U.S. companies expect to operate in a certain way here and they realize their business license may not allow them to do that."

While it needs to be broad, it should also be specific. Make sure you include your location, projected revenues, product or service description, expected number of employees and budget requirements in the plan.

It's also wise to tailor your plan to China's five-year plan.

"If you're making a high-tech piece of lawn equipment, and you just apply saying, 'I'm going to be making lawn equipment,' they're not going to look at you very favorably," says Harris. "But if you say I have this new, software-driven, high-tech piece of lawn equipment that's going to put 20 software engineers in China to work right away, then it's a different project."

To get that message across, of course, you'll need the right representative.


5. Find a liaison … or several.

No matter how informed you are, you won't get very far without consulting a representative to register your business. According to Collins, there are tons of organizations in the United States that can help you navigate the complicated application process. Consult the U.S.-China Business Council or the Ministry of Commerce at the Chinese consulate.

Wong also suggests getting in touch with the U.S. Commercial Service office, which can direct you to local desks throughout China. All of these resources should be able to recommend a trustworthy international corporate lawyer for you.

Harris says to beware of local Chinese business agents that charge $800 for a bad English translation of the business application. "Your chances of getting your company registered with that are zero," he says. Perform thorough background checks or talk to other American business owners to find out who they used to register.

"We used Baker & McKenzie, and they are expensive, but you get what you pay for," says Hoffman. "They did a fantastic job."

A qualified liaison should be able to tell you where you need to go to register, whether it's the local, provincial or national government, and should do the talking once you get there. Harris says, "You need somebody who has negotiated that territory a number of times before and you absolutely have to have people who speak Chinese to go meet with the local officials."

6. Organize the necessary documents.

"There's the written laws in China and then there's the reality on the ground," says Harris. Nowhere does this theory apply more than when it comes to what documents you'll need to register.