How to Establish a Sole Proprietorship in China: Step-by-Step Guide

China has become the fastest-growing consumer market globally, making it a wonderful place to set up your business. A sole proprietorship is one of the most accessible forms of business. 

As the name suggests, it is a one-person business entity. A sole proprietor owns the business and is responsible for all the profits or losses of the company. Thus, the sole proprietor owns the assets and has unlimited liability.

Under China’s “reform and opening” political reforms, sole proprietorship was the first form of the private corporate structure in the country. Another name for a sole proprietorship in China is “individual industrial, commercial units” or “household enterprises.” 

A sole proprietorship has many benefits, such as:

• It is easier to file income taxes than file for corporations
• Set-up costs are lower than the corporations
• Easier to handle business and individual activities by keeping separate bank accounts
• Fewer government rules and regulations govern it
• It is easier to carry on the business by passing it on to the legal heir
• Easier to get out of the business by cashing in and selling the business

There are a few disadvantages of setting up a sole proprietorship in China:

• The growth potential of a sole proprietorship is limited because finding investors becomes difficult
• The sole or individual proprietor is entirely responsible for all the debts and liabilities of the company

However, these limited disadvantages must not prevent you from setting up a sole proprietorship in China.

An individual having Chinese nationality has legal rights to set up a sole proprietorship in China. However, as a foreign investor looking forward to setting up a sole proprietorship in China, it can be done by setting up a Joint Venture (JV) by investing in a business owned by a Chinese national(s) or applying to set up a Wholly Foreign-Owned Enterprise. 

A sole proprietor will need special licenses and permits apart from registering for sole proprietorship depending on the business type. However, an import and export license for international business is the only license and permit that a sole proprietor cannot apply for.

As discussed above, a sole proprietorship is owned, operated, and run by a single individual responsible for all the business decisions, profits, losses, debts, and liabilities. This business entity has several advantages:

• It is a flexible and simplest form of business entity.
• The owner has complete decision-making power towards the operations of the business.
• The taxes are filed at a marginal tax rate.
• Closing the business is simpler as well. 

Every business entity needs to be registered before the commencement of business operations. The documents required for the incorporation of the sole proprietorship in China are as follows:

• An application signed by the investor/owner
• Identity proof of the investor/owner
• Proof of nationality of the investor/owner
• Office Address
• The registered capital of the business

The criteria for registering a sole proprietorship in China are:

• An investor should be a human being, i.e., a natural person having a legal entity
• The business should have a legal name
• Capital contributions by the investor have to be registered
• The company should have a fixed operations site and suitable business conditions
• Finally, the business should have the required number of workers

Each business entity has to be registered with its registration requirements. The investor/owner of the business needs to be sure of the business entity required for carrying out the business operations before registering the company in China. The average time for registering a business in China is two to four months. The owner needs to be sure of the business type and start the process.

• Business Name: registering a business name is the first requirement of registering the business. State Administration for Market Regulation (SAMR) and Administration of Industry and Commerce is responsible for providing the approval for the use of business names after reconfirming that there is no other similar name and there will be no conflict on names. The applicant can apply to any of the two administrations for name approval and registration. This process generally takes about 15 days, after which the registration process begins.
• Legal Compliances: After the registration of the business name, the following compliances have to be met for getting the business registered:

1. 1. Choose the business’s registered office: It is important to find the place for the registered office for the business.
   2. Lease agreement for the office: The local government authority must approve the leave agreements, including the municipal corporations.
   3. Paid-up Capital Requirement: It is always advantageous to have a specific amount for business registration in China. The minimum paid-up capital requirement for the business registration would generally depend on the business entity; for example, for a manufacturing business, the paid-up capital requirement would be approximately USD 150,000. However, the registration of sole proprietorship does not require minimum capital.
   4. Certification of the capital of the business: The public accountant has to certify the business capital meeting the requirements of the company law of the People’s Republic of China.

• Certificate of Approval: After the registration of the business name, it is essential to obtain the Approval Certificate from the Chinese Government by providing the following list of documents:

1. 1. Approval of the business name
   2. Address of the registered office
   3. Identity proof of the legal representative
   4. Identity proof of the supervisor of the company
   5. Feasibility Report along with budget

• Business licenses: The Chinese government has started granting all the applicants’ businesses by filing one application. The licenses which can be granted are as follows:

1. 1. Business License
   2. Organization Registration Certificate
   3. Tax Registration Certificated. Social Security Registration Certificate
   4. Statistical Registration Certificate

• Official business stamp: The official documents must contain the official business stamp. Thus, the business needs to create one.
• Setting up a bank account: Even though it is not a legal requirement for the sole proprietorship to have a separate business bank account, it is advisable not to conduct business transactions in the personal bank account. Thus, it is beneficial to open a separate bank account for the business and sole proprietor to have legitimacy in the business operations. 
• Income tax compliance: Businesses need to obtain the tax registration certificate for filing their individual income tax. Sole proprietors must file tax on a monthly prepayment basis, applicable to those who pay on actual profits.

An individual creates an organization to conduct business. There are several types of business entities: company, partnership, sole proprietorship, joint venture, corporation, etc. The simplest form of business entity is setting up a sole proprietorship in China. It is run by one individual who makes decisions regarding business operations. 

However, it is interesting to note that a foreigner interested in starting a business in China cannot set up a sole proprietorship but instead set up a Wholly Foreign-Owned Enterprise or partnering.

If you wish to navigate the intricacies of setting up a sole proprietorship in China, you should connect with our experts at Multiplier!