Don’t be Fooled by a Foreign Partner

Doing business in China is not easy. However, a local partner may help you navigate the Chinese business landscape easier. With a good partner you won’t have to worry about most of the headaches that come with the climate. A local partner can help you understand the law of the land, Chinese culture, especially with potential clients and the government, business etiquette, etc. Maybe you are focused only on business; however, it’s important to find a reliable partner.

Recently I was involved with a case regarding an overseas investor and his or her local partner. We’ll call the local partner, P, and my client, C, for this writing. P was from the same country as C, however, P had a Chinese spouse and had lived in China, more than five years. C intended to set up a restaurant and was advised by P, ‘only Chinese may rent space zoned for restaurants.’ Essentially, P persuaded C to release investment funds to P letting P’s spouse oversee formation of the restaurant.

I smelled a rat when I heard this story. P lied to C’s face. In China any foreigner may set up a WOFE [Wholly Owned Foreign Enterprise]. Additionally, foreigners may serve in whatever capacity his or her enterprise entails.

Some foreigners will choose to find a local partner. One of the benefits of forming a partnership with a local is you will pay less in registered capital. In the case of P&C, P should have discussed options with C. However, the mistake’s been made. P admitted the investment was made by C. But C didn’t run the enterprise; P controlled all aspects of the restaurant. Under P’s control, the entity soon went bankrupt. C invested and lost more than 1 million RMB.

My client’s story is one of many. In my opinion, you may cooperate with a local partner, but before you enter into any agreement consult with a local lawyer. Make sure you understand the terms and conditions. During contract formation I suggest you hire an independent accountant who can make sure all money invested, is accounted for.

Sophie Mao is Sr. Partner at AsiaBridge, a Guangzhou based law firm offering Intellectual Property Protection, Bilingual Contracts, Mediation and Litigation. Sophie is based in Guangzhou.

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