When either expanding or starting an overseas business, top among the initial challenges faced by a multinational company will be hiring and managing employees for the foreign-based subsidiary. This applies to both expats and locals on assignment as the majority of countries have set in place specific rules and guidelines to be complied with, in terms of employment and payroll administration.
If your business opts to establish a local legal entity in China, then it becomes necessary to also take into consideration all of the cost associated with incorporating a company in Mainland. Among the costs to be met will include setting up and filing the necessary requirements plus the ongoing office administration expense. When launching into a new overseas market, your overall incorporation costs should be considered against other workers payroll and employment options.
1. Company Registration Requirements
When starting or expanding your business into China, if you desire to have your own local structure you will have to setup either a WFOE (Wholly Foreign Owned Enterprise) or a JV (Joint Venture), in addition to meet several formal registration requirements that come with different fixed fees. These will be for catering for items like investor agreements, Articles of Incorporation, and securing/registering the business name. Other additional costs may be registration fees at the state, municipal or regional level which could significantly add to your overall business incorporation cost.
2. Company Directors and Corporate Officers
The majority of local corporate structures will want you to submit a full list of your Board of Directors and corporate officers. China has a stipulation that requires:
- A Managing Director
- A General Manager
- A Supervisor
- A Legal Representative
3. Annual Administration Requirements
On top of the above setup costs, China imposes an annual fee towards maintaining your legal operations in their country. Having a Foreign Invested Enterprise (FIE) in China also embraces other administrative costs include those for filing operational and income statements, conducting an annual audit, annual tax filling and annual inspections as well as regular board meetings plus different necessary office expenses.
4. Ongoing Legal Compliance
For most businesses venturing into China, the number one hurdle to overcome is related to legal compliance challenges. Under China’s legal setup, there are continuous procedures that need to be met. Chinese authorities’ priority is ensuring that any business that operates within the borders is a valid legal entity.
This could imply regular checks by tax and labor authorities, requests for information concerning business operations, audit reports, and employees’ immigration status
5. Required Documents for Incorporating
Incorporation documentation and ongoing compliance is typically an extensive process, with the need for proper maintenance of tax returns, corporate records, income statements and financial reports. For lots of businesses, the costs of company incorporating and the burden of these documentation requirements are best left to a suitable 3rd party such as a location-based service (PEO service) who will also act as the Company’s local employer of record.
6. Legal Requirements
China has its own laws regarding taxation, employment, benefits, and pensions. For expats, the rules are different from those applicable to locals, and this definitely impacts costs.
The legal incorporating requirements includes:
- Registering the name of the business
- Identifying the primary shareholders, investors, directors, and officers of the company
- Obtaining tax identification numbers
- Getting the Company articles of association, shareholder agreements and bylaws in compliance with the legal standards of the host country
- Hiring a resident legal professional to represent the company
- Submitting annual reports and other routine corporate governance requirements to different government agencies
7. Payroll Administration
Running and managing payroll is among the costs that a company can outsource to a suitable local payroll provider in China. Even when a business opts to manage its own payroll, it will still be necessary to engage local legal and accounting professionals to ensure local compliance. This is the reason why many businesses prefer turning to a PEO for the handling of employment and payroll management as it saves both costs and time when entering a new market.
8. Human Resource Training & Employee Expectations
When entering the Chinese market, both culture and language can present challenges. Some language ability, especially for the expats will certainly help in facilitating a smooth transition. This may call for some type of investment into staff cultural training or regular refresher courses to equip employees with local business practices as well as knowledge about China’s social customs.
Due to possible cultural differences, your foreign and local workers may be having different expectations from you as the employer in terms of work duties. Therefore their contracts may be designed to take this into accounts and perhaps have commensurate extra remuneration.
9. Infrastructure, Banking, and Insurance
When setting a legal corporate entity, a number of other costs will come to the fore. These may include some very fundamental elements associated with doing business like opening bank accounts, office space renting, setting up operational and communication infrastructure as well as complying with local insurance requirements.
10. Hidden Incorporating Costs
An example of these hidden costs is capitalization requirements. China has set in place capitalization requirements or also called Registered Capital that have to be deposited with a local bank. This can significantly add to the cost of incorporation. Another area is security, depending on the business activity and industry, it may be opportune to have in place extra security measures in terms of both business data and workers.
Incorporation costs in China will generally vary widely from one location to the next. However, these can at times represent a substantial investment that may exceed your budget expectations. Unless there is a standing business commitment, it may be more cost-effective to seek third party solutions such as a location-based service (PEO).
By using a PEO to engage employees, all sized-enterprises avoid the whole cumbersome process of company incorporation in China, considering it as a highly regulated market. The PEO acts as the local employer of record as it is already established as a legal local entity. The advantage of using a PEO service for a business is fast entry and deployment into a new market. This can often happen in a matter of weeks, compared to what it would take.
How Can We Help your Business?
If you would like to start or expand your business into China, INS as a Professional Employment Organization (PEO) is able to relieve you from all the administrative, legal and economical hurdles described above. Via our labor dispatch solution, we enable our clients to have a commercial presence in China within 1 month without the need to setup a local structure in China (WFOE or Joint Venture). Our clients can develop their business strategy while we manage the back-office administration in compliance to the Chinese labor law.
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