Tuesday, June 2, 2009

Representative Office or LLC in China? That is the question.

Several weeks ago, I received an email from one of my blog readers from US. We exchanged some emails chatting about some Chinese pop musicians, and later he expressed his interest in doing business in China. He said that in future his company would register a representative office in China and work on getting Chinese clients, which prompts me to wonder why foreign investors tend to register a rep. office instead of a LLC (limited liability company) to do business in China. So, here comes this post, in which I'll remind interested foreign investor of the regulations that he/she needs to look into before he/she decides to register a business entity in China, also I'll talk about the pros and cons of a rep. office and LLC.

Before you decide to invest in China, you're advised to look through the Catalog for the Guidance of Foreign Invested Enterprises (Revised 2007) (or, 《外商投资产业指导目录(2007 年修订)》in Chinese), which is a catalog of encouraged, restricted and prohibited foreign investments. Basically, it tells you which industry you are allowed or not allowed to invest in, and in what form, WFOE or JV, etc. Unfortunately, I cannot find an officially translated version of the Catalog. Interested foreign investors may use Google to find unofficially translated English versions of the Catalog. Anyway, don't worry. Foreign investors are allowed to invest in most industries in China. Then, let's look at the pros and cons of a rep. office and LLC.

Pros of Rep. office:
  • No minimum registered capital requirement.
  • No allowed to conduct actual business (only for liaison purpose);
  • Cannot hire Chinese employees directly; Employees sign employment contracts with a qualified HR company (e.g. Beijing Foreign Enterprise Service Group Co., Ltd. or 'FESCO' in short) and employees are then dispatched to work for the rep. office. The service provided by FESCO is not cheap.
  • Must pay taxes even if a rep. office does not have any income. The tax payable is calculated on the basis of a portion of a rep. office's expenses.
Pros of LLC:
  • Can conduct actual business in China;
  • Can hire Chinese employees directly;
  • Pay taxes just like any other Chinese company.
  • Minimum registered capital requirement: RMB 30,000. (Trust me, nobody would do big business with you if your liability is limited to just RMB 30,000. To make your company look trustworthy, increase the amount!)
Rep. office is only useful for companies that need special permit or license to operate business in certain industries in China, for example, banking or securities. Before these companies can obtain a license to operate their business legally, a rep. office is a reasonable choice to begin with. Foreign universities can also register a rep. office to recruit Chinese students. I would advise most foreign investors to registered a LLC if you're serious about doing business in China.

Of course, there are other business forms you can choose. My objective in this post is to advise foreign investors to go for LLC rather than a rep. office. Don't always assume a rep. office costs you less than a LLC (You pay the registered capital and it's still yours, right?).

You may be interested in having a look at the Company Law of P.R. China (《公司法》). By the way, registering a company in China is not so difficult and you don't have to hire expensive lawyers to help, unless your case is complicated and you feel the need to use lawyers. However, if you don't want to waste time on your trips, you may need to hire a professional agent to run errands for you and get your company registered.


Mia said...

The post must be very helpful to foreigner investors. You seem quite familiar with laws, are you a lawyer? In another post you mentioned that your father is a retired engineer, so you don't step into your father's shoes?

Hang said...

Hi Mia, I'm not a lawyer. I used to work as a project manager on investment projects before. And, I worked with many lawyers on many deals. Following some industry policies and laws was part of my work. You're right, I've not followed my father's career path. Actually, I dreamed of becoming a professional footballer when I was a child. Unfortunately, that dream will remain a dream for the rest of my life. :)

China Company Set Up said...

Representative office enable clients to visit an domestic office where the main office is abroad. These may only carry out non-profit activities like providing information to clients and prospects, maintaining contacts with clients, prospects and main office. Thanks a lot.