How to Set Up a Legal Entity for an Independent Consultant in China

The Independent Consultant's Guide to Selecting and Setting Up a Legal Entity in China

Please note that this information is for informational purposes only. Umbrex strongly recommends that you consult with an attorney and tax professional to select the entity type most appropriate for your situation.

Get help setting up an entity in China

In China, independent consultants have several options for business entities, each with different legal, tax, and administrative implications. The most common structures are Sole Proprietorship, Individual Industrial and Commercial Household (个体工商户), and Limited Liability Company (有限责任公司 – LLC). Foreign consultants may also consider a Wholly Foreign-Owned Enterprise (WFOE) for more formal business structures. Understanding the legal and tax requirements of each structure is important for choosing the right entity.

Sole Proprietorship (个体户 - Gètǐ Hù)

Overview: A Sole Proprietorship (Gètǐ Hù) is one of the simplest business structures for independent consultants in China. It allows individuals to operate under their own name without forming a separate legal entity.
Legal Implications: The sole proprietor has unlimited personal liability for all business debts and obligations. Personal and business assets are not legally separated, meaning personal assets can be used to settle business liabilities.
Tax Implications: Sole proprietors are taxed on business income at progressive personal income tax rates, ranging from 3% to 45%. VAT (Value-Added Tax) is required if annual revenue exceeds the VAT threshold.
Suitability: Suitable for local consultants with small-scale operations and limited liability risk who seek a simple and easy-to-manage business structure.
Process for Setting Up a Sole Proprietorship:

Register with the local Administration for Market Regulation (AMR): The registration process involves submitting identification and business details to obtain a business license.
Obtain a tax registration certificate: Sole proprietors must register with the local tax bureau to obtain a tax identification number.
Register for VAT (if applicable): If the business’s annual turnover exceeds the VAT threshold, VAT registration is required.
Open a business bank account: While not mandatory, it is advisable to separate personal and business finances.
Obtain necessary permits or licenses: Depending on the nature of consulting services, industry-specific licenses may be required.

Individual Industrial and Commercial Household (个体工商户 - Gètǐ Gōngshāng Hù)

Overview: The Individual Industrial and Commercial Household (Gètǐ Gōngshāng Hù) is a structure available to self-employed individuals or small business owners. It is similar to a sole proprietorship but tailored for small-scale operations.
Legal Implications: The individual owner has unlimited personal liability for business debts, just like a sole proprietorship. There is no distinction between personal and business assets.
Tax Implications: Individual Industrial and Commercial Households are subject to progressive personal income tax rates and must pay VAT if turnover exceeds the threshold. Taxes are generally lower for smaller operations under this structure.
Suitability: Suitable for small-scale consultants who operate independently or with a few employees. It is popular among self-employed individuals in China due to its simplicity.
Process for Setting Up an Individual Industrial and Commercial Household:

Register with the local AMR: Submit the necessary documents to register as an Individual Industrial and Commercial Household and obtain a business license.
Obtain a tax registration certificate: Required for income tax and VAT purposes.
Open a business bank account: Recommended for managing business finances.
Obtain necessary licenses or permits: Depending on the nature of the business, certain permits may be required.

Limited Liability Company (有限责任公司 - LLC)

Overview: A Limited Liability Company (LLC) is a popular choice for independent consultants who want limited liability protection. It is a separate legal entity from its owners (shareholders), and personal assets are protected from business liabilities.
Legal Implications: Shareholders’ liability is limited to their capital contributions. Personal assets are generally protected, except in cases of fraud or mismanagement.
Tax Implications: LLCs are subject to corporate income tax at a flat rate of 25%. VAT registration is required for businesses with taxable revenues exceeding the VAT threshold. LLCs may also be subject to additional local taxes, such as business tax and urban maintenance tax.
Suitability: Suitable for consultants looking to limit personal liability, particularly those with higher revenues or growth potential. LLCs require more administrative work than sole proprietorships but provide stronger legal protection.
Process for Setting Up an LLC:

Choose a company name: The name must comply with Chinese naming regulations and be approved by the local AMR.
Draft Articles of Association: These must outline the company’s governance and capital contributions. The Articles of Association must be notarized.
Deposit the minimum share capital: There is no longer a mandatory minimum capital requirement, but shareholders must deposit capital that reflects the company’s operational needs.
Register with the AMR: Submit the Articles of Association and other documents to the local AMR to obtain a business license.
Obtain a tax registration certificate: Required for corporate tax and VAT registration.
Open a corporate bank account: Necessary for depositing capital and managing business transactions.
File annual financial statements: LLCs must file annual tax returns and financial statements with the tax bureau.

Wholly Foreign-Owned Enterprise (WFOE)

Overview: A Wholly Foreign-Owned Enterprise (WFOE) is a business entity designed for foreign individuals or companies looking to establish operations in China. It is a separate legal entity that offers full foreign ownership and control.
Legal Implications: The foreign owner’s liability is limited to the capital invested in the company. Personal assets are generally protected from business liabilities.
Tax Implications: WFOEs are subject to corporate tax at a flat rate of 25%. VAT registration is required, and WFOEs may also be subject to additional local taxes, such as business tax and urban maintenance tax.
Suitability: Suitable for foreign consultants looking to operate independently in China. It offers full control over business operations and provides strong legal protection but involves higher administrative costs and complexity.
Process for Setting Up a WFOE:

Choose a company name: Must comply with Chinese naming rules and be approved by the local AMR.
Draft Articles of Association: These must outline the company’s governance, capital contributions, and ownership structure.
Deposit minimum share capital: Though there is no mandatory minimum capital requirement, the company must deposit sufficient capital to cover its operating costs.
Register with the AMR: File the Articles of Association and other required documents to obtain a business license.
Obtain a tax registration certificate: Required for corporate tax and VAT purposes.
Open a corporate bank account: Required for managing business finances.
File annual financial statements: WFOEs must comply with Chinese tax and accounting regulations, including annual financial reporting.

Considerations for Independent Consultants

Liability Protection: Independent consultants seeking to protect personal assets should consider forming an LLC or WFOE, as these structures provide limited liability protection. Sole proprietorships and individual households expose the owner to unlimited personal liability.
Administrative Complexity: Sole proprietorships and individual households are simpler to set up and manage but carry personal liability. LLCs and WFOEs offer stronger legal protection but involve more administrative duties, such as annual filings and corporate tax obligations.
Tax Efficiency: LLCs and WFOEs benefit from lower corporate tax rates compared to progressive personal income tax rates. Sole proprietorships and individual households are taxed at individual rates, which may be higher for consultants with significant earnings.
Foreign Ownership: Foreign consultants should consider forming a WFOE for full ownership and control, especially if they plan to operate long-term in China. WFOEs offer advantages in terms of legal protection and market access, but they come with higher setup and operational costs.