When it comes to company formations, China is from Mars and the Western world is from Venus. For most things related to doing business in China, I often stress the similarities. But when it comes to forming a China Wholly Foreign Owned Enterprises (WFOE) I make it a point to stress the differences. I do this early by stressing how when all is said and done, forming a WFOE in China typically costs more than ten times what it costs to form an LLC or a corporation in the United States or in Europe and usually takes at least ten times longer as well.
I then joke how our domestic business lawyers in Spain and in the United States barely care what they charge for forming companies in those two countries because their overriding goal is to bring in a client for life and then help the client with everything that comes after — on things like contract law work, intellectual property law work,tax law work, real estate law work,employment law work,immigration law work, and more so lately, even international trade law work.Forming corporations and LLCs is essentially a loss leader, made up for later with an onslaught of work typically needed once the company is up and running. Then I half-joke about how forming a WFOE in China is so miserable that by the time our lawyers finish that task “you will be so sick of us, you will never want to use our China lawyers ever again.” I then mention that you very well may not even need to do so.
Why so different? Very briefly, in the United States and to a certain extent in Spain as well, registering and establishing the corporate entity is relatively fast and easy; most of what is difficult comes later. In China though, registering and establishing an entity like a WFOE for the most part cannot be accomplished without doing the hard slog work first.
I will over the next few weeks write more about what must be done to form a China WFOE and why doing so is so difficult and time consuming and different from forming a company in the West. Today though, I will focus on the business scope of the WFOE you will be forming.
What exactly is business scope? Think of it as what your company will be legally allowed to do. When it comes to forming a company in Spain or in the United States, scope is more of an afterthought than anything else. Guess what. This is absolutely not true of China. In the United States, if you want to form a company that will sell men’s clothing at the front of the store and have a cafe at the back, you might list your scope in one of the following two ways:
- Sell clothing and operate a cafe and engage in any other lawfully permitted business activities.
- Engage in lawfully permitted business activities.
The shorter and broader type statement (the second one) would be more commonly used.
But like I said, in China how you would list your business scope is very different. Let’s take the clothing store with a cafe in the back. You might list the scope for that as follows:
- Operate a retail business.
- Operate a retail clothing business with a cafe.
But get this. Depending on the Chinese city (or even the district within that city) in which you are seeking to form your clothing-cafe WFOE, there is a very good chance your WFOE application will be denied for being too broad. When listing business scope for a China WFOE registration, you usually must describe the scope precisely and in a fair amount of detail. After you do that, Ministry of Commerce (MOFCOM) and the Administration of Industry and Commerce (AIC) will almost certainly review every word of your proposed scope to determine if what you are proposing your WFOE will do in China is even allowed to be done by a WFOE (as opposed to by a Chinese domestic company or by no private entity at all.
The Chinese Commerce authorities will also review your WFOE’s business scope to determine whether it can all be done within one WFOE or whether two or more WFOEs will be required. Take the clothing-cafe business. It’s impossible to know what every district in every city in China would do with that sort of scope, but I would say the odds are good that you will need to form two WFOEs to both sell clothes and coffee and baked goods.
Elite Stage is a platform that provides One-stop business Solution for start-ups and foreign enterprises, founded by Venture Capital and Elite Stage Consulting Company, individual Lawyer Partners and Deloitte Auditors. For over 8 years, Elite Stage successfully assisted more than 800 companies from all over the world with their China market entry.