Starting A Company VS Buying A Company

January 21







Disclaimer: this is an edited article taken from  Kudosbay酷豆湾. The term “I” or “Me” used in this article refers to the original author. For the original article



Starting a Company

VS

Buying a Company

~A Case Study~


In a certain group, a discussion arose regarding a foreigner who wanted to sell her company in . I will change some of the numbers and omit details to respect her privacy. With this said, the discussion made me consider how many times I have come across similar situations recently.


Starting A Company VS Buying A Company


She started the topic by just saying she had a WOFE for sale. I will come back to an explanation of what a WOFE is later. I questioned her for more details such as the district and city, the amount of paid capital versus registered capital, industry when it was registered, and if the company had any activity or was clean.


She then indicated that it is a consulting company registered in one of the more central districts of Shanghai and has been in operation for a couple of years (she did mention specifically the exact location and date of registration). She mentioned a range of, according to her, the cost to register a consulting WOFE being between 15,000 and 25,000 RMB and the time could take three to six months, versus the time to change the ownership of three weeks. She did not specifically mention her price nor did she disclose the capital information.


Here are some introductory comments and then I will comment on the specific situation:


  • Having a company in does not guarantee a work permit and residence permit visa. One is required to work legally in or you risk your profits being taken, company closure, plus other consequences as an individual for working illegally.

  • If you are unsure if you qualify for a work permit and residence permit, then I would suggest you figure that out first. Remember that the so-called “points system” is just one aspect of the application process. There are minimum requirements to meet as well as some industries have specific requirements.

  • China has been implementing many corporate and visa laws differ depending on the city and/or district within a city.


Starting A Company VS Buying A Company


Regarding this situation:


– Her message provided incorrect facts:

At least in Shanghai, the process for a foreigner to register such a simple company is between three and five weeks;

Registering such a simple company in Shanghai can be done for much less than what she quoted.


– Complications in registration have been minimized as the government has eliminated the need for any required documents and combined licenses


– Purchasing this company comes with a major risk – when the ownership transfers, you would take over and be responsible for the history of the company


– Taking over this company limits your access to benefits in other districts because even if you change districts for the company’s registration, you are not registering a company from scratch


– Changing districts of a city in China is quite a complicated process for tax and other reasons, and some districts give special benefits for foreign startups


– The fees involved are likely to be considerable. Transfer of ownership (to change the documents); perhaps a transfer of office address (a higher price charged and more time involved if changing districts); and her fee which she did not mention


Starting A Company VS Buying A Company


So, to sum up, the situation, besides taking on the risk of the company’s prior affairs, it does not save time or money and also limits your decisions. In fact, in some regards, it could take longer and be more expensive compared to starting a new company.


This brings up the topic of starting a business in China. Many people have written articles about the business side of this, but there are other aspects to consider, and this is in no particular order.



1. Which type of business is appropriate for what you wish to do?

Some industries are limited as to the type of company that can be registered. The Government is increasingly opening up more industries for foreign investment and for foreigners to start in.


Some common business types are:

  • Registered Office – Your overseas company has an office in China that merely services it’s overseas clients. Your firm in China would not be able to accept payment of any kind and all China expenses must be received from the home office

  • Wholly Owned Foreign Enterprise (WOFE) – As the name suggests, this type of company is set up by foreign investors. This would give foreigners full control over their affairs but the government limits those industries that foreigners can directly in operate

  • Local Chinese Company – This type of company is established by a Chinese national. Some foreigners choose this method because it used to be quicker to register a company. These days, some industries limit themselves to this type of company structure. If you are a foreigner that started the company, the important thing is that you hold the position called legal representative, so you maintain control of the important company stamps and bank account. These do hold a disadvantage of more difficulty with dealing with foreign remittance

  • Joint Venture – This is where a foreign, overseas registered company is in cooperation with a local company in China. In some industries, firms are required to have a joint venture to do business in China and I would only suggest this option if you have no other choice because of the complications that can arise with many other issues relating to doing business and trust



2. Where will I register my company?

  • Especially for foreigners, it shall be the same city in which you plan to spend the primary amount of your time in China because a company registered in City A cannot assist for a work permit and residence permit for City B, and you have to prove you are living in that city as part of the application process

  • Some districts of certain cities have special benefits if you register there, depending on the industry such as lowered registration procedures or tax benefits, and changing districts is quite difficult because of mainly tax reasons. Furthermore, as mentioned below, all of your documents have to be redone if there is a change of address or other company or personal information about your changes

  • Regarding specifically where, according to the Ministry of Commerce, a virtual office is fine, but according to the Public Security Bureau that inspects a company if a foreigner is employed in it, then it must be an office with a door, walls, and a window. If there’s an address change then all of your documents have to be redone, including your work permit

  • Some co-working spaces and some serviced offices can while others cannot. It depends on how they registered their space with the government (as one office or many offices)

  • Some industries have specific requirements regarding the type of space, size, and other features, as well as how space has been classified to the government (such as food and beverage)


Starting A Company VS Buying A Company



3. How will I register my company?


Starting A Company VS Buying A Company


  • Will I link it to an overseas company? For many industries, a foreigner can register a company with the use of his or her passport without the need of an overseas company and many agents will not suggest this option because it is not in their business interest to suggest it

  • Will I use an agent or handle it myself? Theoretically, you could register a company yourself, but for many foreigners, it is just not practical with all of the application materials needing to be in Chinese and the complications of preparing documents and going to the government offices

  • Agent prices and information vary. Firstly, you need to compare “apples to apples and not apples to oranges.” What I mean is some agents will charge a price and only include some aspects of the process, as compared to others. To determine the real value of their offering you need to compare if they are providing the same services. Secondly, to determine if they are trustworthy and honest, then this involves asking the right questions. Too often we hear about people that had problems with an agent. Finding out about the running costs is also important because many agents will charge a low startup cost but high annual running cost



4. How much capital will I register?


Starting A Company VS Buying A Company


There is a difference between registered capital and paid capital. For most people’s situation, then the registered capital does not have to be paid until at most at least 20 years later. With this said, some individuals’ personal situation and/or some industry requirements will mandate that a certain amount of this has to be paid. While there is no minimum capital to register, it has to make sense according to the operation of your business.



5. Does this industry require special licensing, and if so, is it realistic for me to continue?


For some industries such as import/export or food and beverage additional license(s) and requirements are needed to be met before you can conduct your operation. There may be many additional licenses required and this only guarantees the right to do business in that industry. It does not guarantee the success of your operation or that you will have an easy time in practice for operating your business. Some additional licenses are almost impossible to receive for a “normal” circumstance such as education without serious investment in the facilities and/or future operation of the business, and this may deter you from going in that direction


A couple of other notes for doing business in China:

  • The binding language of an agreement is Chinese. is sometimes provided just for convenience. In special situations, it can be stipulated that the binding language is another language, but it has to make sense and none of the parties involved can be Chinese. Original Chinese corporate stamps are required. Copies of contracts that do not include the original inked stamp are not usually accepted by a Chinese court

  • The legal representative or possibly a company director is the only one that can execute a deal. If executed by another party in the company then a deal is invalid and would face difficulty with enforcement

  • Hong Kong companies are not Chinese companies. They do not give benefits to doing business in the Mainland. They are viewed as foreign companies just as a company overseas in any other jurisdiction. One issue with having a direct deal with a foreign company and Mainland customers or companies is a lack of trust. Another is accepting payment as official, corporate mobile payment accounts can only be set up by Mainland registered companies, and people and firms in the Mainland are reluctant or may be unable to make payments overseas. Lastly, enforcing your contract, if need be, is difficult because getting the other party to an overseas jurisdiction will not happen and your chance as a non-Mainland registered company in a Chinese court is low


All of this is before you consider your business plan, possible company names, and other aspects to your future business operations.




Image sources:

Kudosbay酷豆湾, https://eolas.ie, lifehacker.com, 

www.fxstreet.com





Source: Julian via Kudosbay酷豆湾



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