Investment in a Business

[muyongshi]

Okay, it's late and I'm tired but I want to get this question out there and I am just hoping it comes out clear enough.

I have an opportunity to go in with some Chinese friends on a business venture and become an investor/shareholder in the new company. My question basically is what do I need to know/do to make this happen?

My question is specifically as it refers to the government. Do I have to apply to work with them or can I just invest the money (it would be about 10% holding 15,000 US investment)? Will it affect them in there ability to do it? Would another option be just to do it with the friend having given him the money but nothings in my name in the business? Any experience or a good place to go to find this info would be a great help!

Thanks!

[imron]

Would another option be just to do it with the friend having given him the money but nothings in my name in the business?

Whatever you do, don't do this, it's a good way to lose both your money, and your friend.

Your best bet is to go with your friends to the 工商局 where you plan to register the business, and ask them there. They usually have an information desk for helping people with such enquiries. Make sure to come back and let us know what happens

[muyongshi]

I wouldn't normally do recommend that either and I would be concerned more about the legality of it (rather than the guy just wanting my money...long story there but I think he has enough of his own- 38 and retired...)

I will probably go down at some point but was hoping for maybe a bit of things to know/look for so I can be semi informed before facing the 四川话 explanations at the government office...

[Senzhi]

I doubt that 10% of investment will be enough to convince the local government of a joint venture.

And I firmly agree with Imron: without the legal support the risk is simply too high. Damn, even with the legal support the risk would be high.

Friends are friends, business is business. In my humble opinion both are two completely different things. Be careful.

Businesses do spend money unofficially to maintain guanxi (escpecially with government officials), but only so if they are firmly established as fully foreign owned enterprise or a joint venture. Giving money just like that without official backup is likely to put you into trouble sooner or later.

[Quest]

Don't be too trusting of your friends when it comes to business. Usually, owning and operating a business with your friends is a good way to kill the friendship. It won't be easy to make sure everyone [feels that everyone] contributes positively or even doing their fair share of work, and because you can't fire a friend, sooner or later it will turn ugly. Even if one provides the most capital initially, if he just sits on his 屁屁 thinking he's the biggest boss and does nothing, the other friends won't feel good having to always give him a part of what they earn with their hard work, especially when they start to earn more than the money the lazy guy contributed in the beginning. Legally protecting yourself is a first step, but also avoid having too many people that can give orders but can't be fired. Choose your partners carefully, think about how animosities can be avoided down the road, this goes beyond having a verbal agreement now, because feelings change when the situation changes. Also, make sure a guy never gets entrusted with a large sum of money, he might just disappear one day; don't bet on law enforcement on finding him either, especially in China.

[lemur]

I have to agree with everyone who said don't mix friendship and business. I've seen friendships destroyed because these were not kept separate.

I've broken that general rule only in very limited circumstances. For instance, I've had friends who were in desperate need of money and needed a loan to pay their rent or something similar. (Any loan is "business" as far as I'm concerned even if I'm not doing it for profit.) I've loaned them the money "off the record" but the amount was small enough that I genuinely thought that if I never got the money back I would not be bitter about it.

In some cases, I never got the money back... and I'm not bitter about it.

For any serious amounts I would not do anything "off the record". Everything should be on the record and the record should be kept somewhere safe.

[gougou]

I doubt that 10% of investment will be enough to convince the local government of a joint venture.

If I recall correctly, you need 25% foreign investment to be eligible for whatever is left of the advantages for foreign companies. But I don't think that was the point of muyongshi's question, and as far as I'm aware, there's no limit on how much you can invest (i.e. below 25% is fine, too, you just wouldn't be counted as a foreign-invested company).

But of course, a trip to the 工商局 should yield an answer quickly enough (I don't even think it'd be complicated to an extent where 四川话 would be an issue).

[muyongshi]

I appreciate everyones concerns but I would appreciate if the replies would help with my question more. I know everything that you guys are talking about as I have attended business seminars for doing business here in China (usually focused on joint venture/WOFE) and have heard all the horror stories and so forth. I know how to do business and we are not going into this as friends and we have already worked out structure and what not. I do understand all the warnings and I'm not saying it's not applicable to me or that it won't happen to me but in this instance I am doing something I normally wouldn't do because 3 out of 4 of us have a lot of experience in running a business and investment. Only 2 out 4 would actually be involved in the running of the business (one as the 老板 type figure- the one that just stands there all day greeting people and shaking hands, and going and getting drunk at meals, one as the operational manager [the only one of us who could actually really run this business as this is his profession] and then me and the other guide are simply investors).

I did not want to get into all that because there really isn't a need...I'm just hoping we don't have to create a 5 page long discussion on the dangers of doing business with friends/china or something like that. Thanks again!

[imron]

According to the law:

第一条 中华人民共和国为了扩大国际经济合作和技术交流，允许外国公司、企业和其它经济组织或个人（以下简称外国合营者），按照平等互利的原则，经中国政府批准，在中华人民共和国境内，同中国的公司、企业或其它经济组织（以下简称中国合营者）共同举办合营企业。

What's curious about this is that for the foreign party they specify it can be a 外国公司、企业和其它经济组织或个人, but for the Chinese side they only specify 中国的公司、企业或其它经济组织 (note they do not mention 个人).

So, although from this it seems that you might not be able to invest with other individuals (though you should check for sure with the 工商局) it should be possible to do it with companies. If you're investing that much money, presumably the other investors are putting up at least as much too? If so, then with that amount they should be able to open their own company (minimum amount of registered capital required for a 1 person company is RMB 100,000), or perhaps your friends have their own companies already. Another option would be for the three Chinese partners to form a separate holding company first (minimum amount of registered capital required here is only RMB 30,000). If that was the case, then you could invest with those companies (as opposed to the individuals). Anyway, that's all just speculation on my part, rather than actual legal opinion, but it should be something to get you started.

[imron]

Reading on a bit further though, there's also this: 在合营企业的注册资本中，外国合营者的投资比例一般不低于百分之二十五。 Not necessarily a show-stopper if you are 非一般

[muyongshi]

I haven't had time to read through the link but just the parts you've posted and that is a great starting point! Thanks a ton Imron, that will be a great resource to have. I hope I can get a chance to hit the 工商局 before I head for the US at the end of the month. I'll let everyone know what comes of it...

[imron]

You might want to read the 《公司法》also. All of the laws there will also apply unless overridden by the 《中外合资经营企业法》

It's actually quite an interesting read. Haha, maybe we could start up a Law of the Month series

[muyongshi]

Haha, maybe we could start up a Law of the Month series

Let's just do a month series for everything! Dish of the month, law of the month, toothpaste of the month, cleaner of the month, car of the month...all of course Chinese brands and what not

[simonlaing]

Hey Muyongshi,

I know you've been around. The reason why people often liked the JV and WOFE is it used to be much harder changing RMB to foreign currency. If you started a JV/ WOFE you could convert 25% of profit directly to foreign currency and the rest through HK.

Now the government isn't worried about reserves and is more flexible about changing of money.

Also you should check out if it is limited liability or simple private company. If not limited liability , as a major shareholder you could be liable. But it doesn't sound like a small restaurant/inn would be able to get you in that much trouble.

Also chinese companies sometimes pay more tax than western ones (though this is changed as most western companies have finished their low tax period)

I almost started a training school here in Nanjing, but was detered by the amount of competition. If looks like a good deal go for it.

Also there are stories of westerners who and started or bought into tourist restaurants in yangshou, lijiang and are doing well. So one in Sichuan could be good.

Tell us how it goes.

Good luck,

Simon:)

[muyongshi]

Guess I should mention what type of business it is...just to avoid speculation. It's a gym and the one guy is a trainer and has run many gyms as well as is a national weightlifting champion (way back when )

Thanks Simon for that, it helps!

[imron]

Also you should check out if it is limited liability or simple private company

Once again, according to that same law: 第四条 合营企业的形式为有限责任公司.

[gougou]

Once again, according to that same law:

You've got it memorized by now? Lawyers are in demand round here!

[imron]

I've actually contemplated studying Chinese business law more seriously. I did a semester of it at Tsinghua at the beginning of last year and really enjoyed it. Incidentally, I also wrote an email to my professor from that class asking her opinion on this problem - no specific details, just asking what the law is regarding foreigners and chinese starting a business together. It's something I've also wondered about in the past, and now seems like as good a time as any to ask.

[muyongshi]

So any specific news from your prof or was that what you already posted what she said?

Edited July 15, 2008 at 02:44 PM by muyongshi

[imron]

Haven't heard back yet. Will post here when I do. I haven't been in contact for about a year so am not sure if I'll get a reply.