The challenges of starting a business in China – Part 1 (Location, Location, Location)
When I first set out to explore the idea of opening an office in China I had zero experience with any foreign processes outside of The United States. I have opened several companies in the U.S. and the process is always simple, cheap, and straight forward since I am a U.S. citizen. I was single handedly given the task to explore the cost, processes, and challenges of starting a new business in China. This led me into a four-month exploration process of intense knowledge collection that opened my mind to a whole new world of business I hadn't previously known existed.
The first thing that I quickly came to realize was that if Hitcents wanted to do business in China we would have to get a business license registered in one of the districts. There are several different kinds of business types that can be started in China, but what made the most sense for Hitcents was a Wholly Foreign-Owned Enterprise (WFOE) where our United States base company will own 100% of our new Chinese company. This new company will allow us to open bank accounts and accept payments from various customers in China. The banking system to transfer money between the U.S. and China is outdated and expensive to say the least. Transferring money has to be done by wire transfer, which costs you every time and also holds its currency state. This means if you transfer USD to a Chinese bank account it will remain USD. The process for converting USD to RMB, the Chinese based currency, requires a visit to the bank. On the other hand, transferring money from one Chinese bank account to another is easy and using a local Chinese bank will help to collect proper taxes for VAT with little administration overhead. This further proved that Hitcents would need to be established locally to really do business with surrounding companies.
Early in the exploration process, I quickly discovered in order to have a business license in China you also have to occupy a physical office space. Most countries, including Hong Kong will allow businesses to be setup with a virtual office and address, removing the requirement to actually be present in the country. China is different; they do not want people doing business in China that are not vested in the country. Getting the office space is sort of a chicken and an egg situation. You have to have office space to get a business license, but you can’t sign a contract for the office space until you have a business license. You also don’t have a bank account yet so paying for the office space is challenging. While I have personally looked at over two dozen offices, there doesn’t seem to be an established way of correcting this issue. I had some people tell me I can just pay and sign contract after the business is setup, while others wanted me to wire transfer all rent payments for three months and sign a contract that would be transferred over to the new business once it gets set up. These are just terms that have to be worked out with the landlord before moving forward with any rental agreement. In addition, the contract provided from the landlord is often presented only in Chinese, so if you don’t have a Chinese lawyer or can’t read the language make sure this topic is brought up early on.
To become "local" there is a huge decision. You have to decide what location makes the most sense for a new business in China. China is large and has considerable diversity across several big cities. At the present time there are nine cities in the U.S. with over 1 million residents, in China there are over 160 cities with over 1 million residents. Each city has its own advantages and disadvantages such as labor cost, tax rates, living expenses, transit systems, pollution, and traffic to name a few. In addition to the previously listed, each industry seems to settle into specific areas within China. If you are going to properly network while working in China it is important to be in close proximity to other business in the same industry. Hitcents focuses on Software/Application development so it came down to Shanghai, Beijing, and Shenzhen. After spending time in each area we ultimately decided on Shanghai based on many factors.
Once the city has been decided upon you are half way there. It is important to determine what city the business will operate in, but choosing the district is just as important. Each district can provide different tax incentives for starting a business there. The trouble is the office needs to be located in the same district for tax reasons. Moving from one district to another is very complicated, time consuming and costly. The tax incentives are also not standardized and require negotiation with someone from the district. There is another whole process if you settle in a High Tech Park, as they share tax revenues with the district. Normally in the US there is a standard term sheet to outline all of the specifics, but this is not the case in China. It’s difficult to get a straight answer on things such as minimum payments, payment frequencies, reporting policies, length of rebate and others. Be prepared to go back and forth several times before getting all details nailed down and push for an official contract to be produced. If a contract can be generated it will be in Chinese so you must have a lawyer that can help with this process. It was the first time in my life I signed a contract where I wasn’t 100% sure what any of it said because it was only in Chinese. Fortunately for me, I trusted my lawyer.
We decided to register Hitcents in the Shanghai Multimedia Valley (High Tech Park) in the Zhabei district based on competitive tax rebates and other social services the park was willing to offer.