The profile of the typical international family in Beijing is rapidly changing. While there are still many who are posted here for a few years by their governments or multinational companies, increasing numbers are entrepreneurs, drawn here by China’s booming economy and still untapped potential. And if you’re accompanying your partner here for their work – as the unflattering jargon has it, a “trailing spouse” – then you might want to set up in business for yourself, to make sure your own potential isn’t wasted.
However, while doing business in Beijing holds many attractions, it also has pitfalls. And the penalties for getting it wrong, legally, socially or financially, can be serious.
To guide us through this maze, we spoke to two experts. Mr. Ken Lee, Partner with Lee & Lee Associates (www.lla.cc). He is a certified accountant in China and the UK, as well as being a certified tax Agent and internal auditor. He’s worked with international companies and accountancy firms, and written for and edited books on taxation, accounting and law.
We asked Lee whether it’s possible for a foreigner to set up in business alone, or whether they’ll always need a local partner.
“In considering whether a foreigner needs a Chinese partner, we need to take into account two aspects: legal and business,” Lee told us. “From a legal perspective, if the business to be conducted is prohibited according to the State Industry Catalog, then foreigners are not allowed to establish a business in China. If the business is a restricted industry, then the foreigner needs to find a Chinese partner to set up a joint venture and the shareholding interests may be restricted to a certain percentage.
“From a business perspective, if the foreigner is quite confident in his/her capability and experience in the Chinese market, then the foreigner can choose to set up a Wholly Owned Foreign Enterprise (WOFE) so that he/she can have full control of the company. If the foreigner is short of some key resources, such as key technology, sales channels for certain industry, etc., then to find a Chinese partner to work together with would be a better option to grow the business quicker. To set up a WOFE, the industry must be a non-prohibited and non-restricted industry according to the State Industry Catalog.
“No matter what option you choose, obtaining practical and affordable advice from professional accountants and legal consultants is key to protecting and developing a good business.”
To Lee’s words of wisdom, we’d add our own warning: make sure your partner is someone you can trust. If the relationship breaks down, the law will tend to take the side of the Chinese citizen. Here at beijingkids we’ve heard many tales of woe where people have put time and money into a business, to be left with nothing when their partner splits from them.
However a local partner can be valuable for developing guānxì, that network of connections and loyalties which underpins so many aspects of Chinese society.
“Guānxì in China is very important,” Lee agreed. “As you may know, Chinese people care more about personal relationships. Thus, it is critical to try to make good relationships with your clients or customers, vendors, partners and also government authorities.”
There are other cultural differences in the way of doing business. Westerners might find Chinese business practices to be maddeningly slow, indirect, and opaque. In contrast, Chinese businesspeople often consider westerners to be impatient, abrasive, and disrespectful. Before making a deal you should expect there to be a “courting” process, which may seem frustrating but is essential for establishing trust.
“Cultural difference is quite a big topic,” Lee said, “and it includes many aspects, such as the manner of your speech and the words you choose, gestures, ways of making contact, drinking, and eating, with Chinese employees or clients. You can learn about it by hiring some professional and loyal Chinese employees, or finding professional agencies to consult.”
Seemingly endless form-filling is another reality of doing business in China.
“To set up a company you will need various paperwork,” Lee told us, “including the notarized and authenticated investor’s certificate, AOA (Articles of Association), office rental, and the investor’s bank credential letter, etc. At LLA we usually provide you a list of information required for your business establishment. For a WOFE, it will take about 2 to 3 months after all the documents are ready before the process is completed.”
And it doesn’t stop there.
“After the company is set up, there will be annual filings, such as filings to the Administration of Industry and Commerce, Finance Bureau, Tax Bureau, Statistics Bureau, etc. There would be also monthly and quarterly filings for state and local taxes, labor union fees, and so on.”
You also need to make sure that any investment you’re relying on is legal.
“Investors could be foreign individuals or foreign companies,” Lee said, “and the Chinese government will check the country of the investors. Most countries can invest in China. However, different cities in China may have different restrictions on which country cannot invest in China. Thus, it is better to consult the authorities beforehand as to whether or not the investment from those investors is allowed.”
And don’t forget to pay your taxes!
“What taxes to pay are decided by the services to be provided and products to be sold. They need to be assessed when the company’s accountant visits the state and local tax authorities at the registration stage.”
Tax liability is also dependent on the all-important fapiao. Whereas in most countries any company can issue its own invoices and receipts, in China only officially issued government forms are valid for tax purposes.
“Fāpiào,” Lee explained, “is the Chinese pronunciation of official receipt. It is regarded as the only legal supporting document for expense and cost. They are strictly controlled by tax authorities. Violation of the regulations of fāpiào could trigger various penalties.”
All this can seem intimidating, and Lee agreed that it may be best to dip your toe in the water first.
“You could find one local trader first,” he said, “to test the market situation and the way of doing business in China, before setting up a real company.”
But don’t panic, help is at hand!
“To start a business in China, there are various issues and difficulties,” Lee said. “A good professional firm [like his own Lee & Lee Associates]can offer various solutions to help you get through the difficulties. This help could be with company set up, hiring people, payroll, social insurances, accounting, tax, audit, various government filings, planning and budgeting, finance and investment, credit research, etc.”
Somebody who knows all about the opportunities and challenges of doing business in China is British-born Jim James. He moved to Beijing because the clients of his Singapore PR firm, Eastwest Public Relations, wanted more support in their biggest market. He identifies three key issues for anyone starting up a business.
“I have now started some seven companies, across Singapore and China,” he told us, “and the common issues are cash, people, and clients. Cash enables the business to create what clients may eventually buy, and people are the essential machinery to turn the business model into a cash generating vehicle. A business is about profit, risk and time. Cash is the number one bottleneck at the start and throughout the lifetime of a business as the entrepreneur tries to formulate the right equation to optimize profit whilst reducing the time to deliver and remove the risk for the shareholders, staff, and customers.”
It’s important, he told us, not to spread yourself too thinly.
“The biggest mistake that I have made is to be mission critical to more than one business at a time. Playing different roles within different companies is possible, but being the sole source of vision, cash, and staff motivation across multiple businesses has meant that I have not been able to give the individual teams all the attention that they need to be fully engaged.”
But while managing your time is perhaps the greatest challenge of entrepreneurship, it’s also one of its greatest benefits.
“I have achieved some level of success in having a portfolio career which affords me the choice of how to allocate my time,” James said, “and as I get older it is time that I realize is the greatest asset of all. My 23 years of self-employment have not made me wealthy, but I am able to afford good education and healthcare for my family, and the ability to do work that I enjoy with people that I respect. Much is written of entrepreneurship as a path to wealth and fame, but for my part the true success is being able to control one’s life by adding value on my terms.”
The most important thing, according to James, is to be clear what you want to get from the experience of running a business.
“Evaluate the motivation for entrepreneurship – is it to change a societal issue, to make a fortune, to be independent, to do what you enjoy?… everyone’s motivation is different and may include many of these and others. That motivation will impact the kind of business and scale of business that one will be able to make into a success. Entrepreneurship is not for everyone as it carries many stresses along with the positives. Read the Richard Gerber book, The E-Myth, to understand that entrepreneurship takes on many different forms, all of which are equally valid, and remember that entrepreneurship is not a one way trip; it can be part of a portfolio career.”
And for all the challenges, running a business in Beijing offers unparalleled opportunities.
“China is the largest car market,” James said, “the thirstiest beverage market, largest outbound tourist market, etc. So as much as I loved Singapore, and retain Eastwest offices there, China’s magnetic power is the vastness of the market.”
Photo courtesy of Jim James, Ken Lee
This article originally appeared on p 48-50 of beijingkids May 2017 Home & Relocation Guide.
Download the digital copy here.