The corporate landscape in China has gone through remarkable changes over the last few decades. The country's entry into the World Trade Organization (WTO) resulted in the liberalization of different industries. This opened up new opportunities for both local and foreign companies to earn high profits by investing in China. 

If you are also looking for the next big business opportunity, you should consider setting a wholly foreign owned enterprise (WFOE) in China. This could be a viable option as you will be free to chart the course of your business while remaining within the confines of local business laws. Also, setting up a WFOE in China will allow you to convert your profits from RMB to local currency and transfer it to the parent company located outside of China. 



Having helped many foreign companies in setting up a WFOE in China, we have seen many entrepreneurs make common mistakes that created difficulties later on. Here, we have listed seven common mistakes that you should avoid when establishing a WFOE in China. 

Mistake 1. Defining Less Registered Capital then Required

One of the common mistakes in setting up a WFOE in China relates to the declared registered capital. The capital decelerations mean that the initial investment was declared for the wholly foreign owned enterprise (WFOE) in China. This is required when an application for setting up a business in the country is sent. 

While there is no minimum amount for declaring the registered capital, you still need to make sure that the amount declared is reasonable for meeting all financial needs. So, it's important to properly calculate the actual capital needed beforehand. You should make the calculation based on when the first income is to be expected. 

If you declare an amount that is less than what is actually required, it could lead to cash flow issues. In case you later realize that additional capital is required, you will have to go through a costly and lengthy bureaucratic process to change the registered capital. 

Mistake 2. Defining a Scope that is Too Wide or Too Narrow

When setting up a WFOE in China, you should define the scope of your business. The scope must be mentioned in the company's Article of Association. Unlike in western countries, a business scope has more impact and so must be carefully defined in China. 

A lot of foreign entrepreneurs don't properly align the business scope with actual activities. This creates difficulties when applying for tax incentives and breaks. You can also be fined and your license withdrawn if you are not operating according to the defined scope of the WFOE in China. 

Mistake 3. Being Careless with 'Chops'

Most western businesses use the signature to validate and legalize documents. However, companies in China use 'chops' or stamps to verify documents. 

The chop is a tool to legalize documents. Different types of chops grant different authorities. The four important chops include the following: 

• The contract chop
• The legal representation chop
• The company chop
• The executive director chop

Being careless with chops creates difficulties. It increases the chance of internal company fraud that could result in millions in losses. For instance, someone could use a company chop to change the stock structure and take ownership of your company. So, it's essential that only those people who have authority to make decisions regarding the WFOE have access to these chops.

Mistake 4. Establishing the Wrong Type of WFOE

A lot of times traders select the wrong type of business when setting a WFOE in China. This creates difficulties when setting up the business. 

Generally, WFOEs can be categorized into trading, manufacturing, technology, consulting, manufacturing, and food and beverage. There are differences in procedures and costs in setting up these businesses. Some are easier to set up than others. For instance, setting up a service WFOE in China is relatively easier and requires less capital. Make sure that you select the right type of business during the application process to avoid bureaucratic snags when setting up a business. 

Mistake 5. Selecting the Wrong Representative

You should select the company's representative carefully when you establish a WFOE in China. There are different positions that need to be filled such as:

• Legal representative 
• Executive Director
• General Manager 
• Board of Supervisor



A legal representative, executive director, and general manager can be the same person. But the superior needs to be a different person. Not paying attention to the importance and scope of these roles can create problems later on. 

Mistake 6. Selecting the Wrong Location for the WFOE

Often, entrepreneurs don't focus on the location when establishing a wholly foreign owned enterprise (WFOE) in China. However, this is one of the most crucial decisions that could affect the success of your company. You should consider different factors like infrastructure, proximity to market, demographics, availability of skilled employees, and others. 

You should select the right location during the application process as changing the location later on — even if within the district — requires a time-intensive and costly procedure. You may have to deregister and then register to another tax bureau. This is something that you could avoid through a careful consideration regarding the location of the company. 

Mistake 7. Underestimating the Difficulties in Establishing WFOE in China

A lot of entrepreneurs underestimate the problems involved in setting up a WFOE in China. The reality is that creating a WFOE in the country involves a lot of complexity. While the Chinese Ministry of Commerce makes laws for setting up a business, each province interprets the laws differently. In addition, the interpretation of laws relating to establishing a WFOE in China is different in tier 1, tier 2, tier 3, and tier 4 cities. So, you not only need to know the national rules for setting up a business, but also understand the local interpretation of those rules.

By hiring a professional, you don't have to worry about complex bureaucratic tasks to set up a WFOE in China. The professional consultant will know about the peculiarities of business law in the area where you have decided to start a business. Also, the professional will know key people in the area who can facilitate in establishing and running a business in China. 

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