With a strong economy, more and more businesses are seeking to either start a business or gain market share in China – which can be extraordinarily challenging.
In the West, business environments on the whole are entirely different from the Chinese environments and this can really conjure up a place where it is very easy to find your business in hot water relatively quickly.
For businesses seeking to enter the Chinese markets it is strongly advised that you seek help from a Chinese consulting firm that would be able to guide and assist you in your dealings. The Chinese legal structure is fundamentally different to legal structures in the West and there are varying business models that coincide with China’s maturing laws.
There are two primary business models in which the PRC (Peoples Republic of China) accept which are Sales Office via Labor Dispatch and a Wholly Foreign Owned Enterprise (WFOE). In this piece we will look at the advantages and disadvantages of each model so you can do your due diligence to find a model best suited to your needs.
Option 1: Sales Office via Labor Dispatch – Using A PEO
The most highly regarded and effective business model is to use what are called PEO’s, or Professional Employment Organizations– which is a very cost effective solution for businesses that lack any presence in Chinese markets.
A PEO won’t only provide legal, fiscal and administration structure that arguably most companies lack even when operating in China, but can also act as a subsidiary. This enables businesses to overcome delays and any legal roadblocks in order to operate the business freely in the way that they want too.
There is also a huge advantage here for employment, since there is no direct relationship between the foreign company and their dispatched employees. Instead the PEO assumes the responsibility of operating contracts with the dispatched employees separately – which is accepted under Chinese law.
From full administration, tax compliance, HR, office rentals, a PEO supports foreign companies pretty much every step of the way and this can bring enormous peace of mind to effectively work stress-free.
The Advantages of using a PEO in Short
- Ability to outsource all HR, Fiscal and administrative procedures whilst maintaining full control of the company
- Not impeded by evolving labor laws or any other legislation that gets passed
- No requirement to establish local structure which means saving time and inevitably money
- The most cost effective way to enter the Chinese markets
- Lower taxes – there isn’t any physical local structure to be taxed – the PEO takes on this liability.
Disadvantages
Cannot open a credit bank
- Finding a GOOD PEO requires time, research and a lot of due diligence in general
Option 2: Wholly Foreign-Owned Enterprise (WFOE)
Aside from PEO’s, WFOE’s are another option that businesses opt for. WFOE’s are a common investment vehicle for mainland China-based businesses where individuals or corporate entities can incorporate a foreign-owned limited liability company. In a country such as China, which has stringent regulations for setting up foreign subsidiaries and the considerable benefits of regional prominence and a strong consumer base, with a China WFOE partner that is experience the process can be streamlined.
Originally, the intent of the WFOE structure was to essentially export technology driven manufacturing activities. This has somewhat diversified over time and now are used by management consulting companies who are looking to immerse themselves in the Chinese economy.
Advantages of utilising a WFOE
- Can easily convert all revenue from RMB to any other fiat currency
- Solely independent when formulating and defining a business strategy
- Can protect their intellectual property far more effectively
Disadvantages
- The required capital on certain kinds of WFOE’s can be substantial
- There are limitations on business scopes
- The process can be long and arduous as there is a need to develop localised structure in China
- All revenue will be subject to Chinese taxes including VAT, Corporate, Income and Dividend.
The financial gains can be insurmountable, but be patient
The earning potential from competing in the Chinese markets can be extraordinary. Whichever avenue you take will take commitment and dedication to building up your business plan, securing investment, patience and willing to learn.
If you’re not prepared to put your all into making the move into the Chinese economy, then it’s best to revisit your business plan and intention to enter the Chinese markets.
