Sounds like they run their servers outside China. This works if most of your users are outside China. It can be highly problematic if most users are inside China.
I do not agree with using "pseudo-legal registration hacks" unless you really have to, that is, your business is doing things the China gov frowns upon or your biz model can't be easily classified. In years past, there was little choice. Now, its not too difficult to run a proper China Internet entity. You do need a local Chinese company to hold your Internet operating license. This is not your license for your business and real/intellectual property, this is a license for operating a server in China. This creates trust and contract issues, but there now exist trustworthy partners. I recommend to anyone wanting to target the China market to have a local Chinese business partner. It doesn't matter how smart an expat you are, the locals will always understand some things better than you.
Hosting within China does cost more. As an example of the low end of server hosting, I ran a 2U server (I owned it) for an annual fee of $1200. For that I receive an unmetered 1Mb connect. That was the contract. In reality, I was connected to the IDC's 100MB switch and nothing was managed. I never had problems. Some IDCs are better managed than others.
As for payments, if your users are paying outside China, you use a HK or other entity for those payments (you'll most likely need an HK entity anyway to comply with China regs). For payments in China, use a China bank and China payment system.
Final note: for bootstrapping and proof of concept stuff, it can make sense to crank things up in the U.S. or HK and ignore all local rules until you know more. But you should plan to clean up your China requirements as soon as possible.
jhancock, you're based in Shanghai right? If you have time, I'd love to get a drink with you and talk... send me a mail at pm -squigly sign- gom-jabbar.org
Also for any shanghai based hners here, feel free to contact me and let's meet up :-)
"final caveat: none of this is relevant if you want to start a company that is technically registered in China and bills in RMB. If you need to do that find someone who has done it and buy them a drink. No-one posts about their pseudo-legal registration hacks on the Internet but the expat community in both Beijing and Shanghai is pretty supportive and the successful entrepreneurs I’ve met here have been incredibly grounded and very open to sharing their stories and trying to help out others."
I find it totally ridiculous starting and investing your own money and life in business that is created on "pseudo-legal registration hacks". One day you may lose everything!
Indeed, you may. In fact, it's quite likely if you ever show real profitability. That's part of doing business in the PRC. There's a long list of foreign entrepreneurs who got robbed blind, often with government support.
That's why the article strongly recommends doing business in Hong Kong. In HK you still have some measure of order and civility in the business world, and there's some legal protections for your business. On the mainland, it's the law of the jungle, where the person with the highest government connections takes everything. Hint: that's not you.
One more thing. There are two types of laws in China. There's the "public" laws, that are published. There's also the private laws, that are not. You have no way of learning about these laws, and you're always in violation of something. "Quasi-legal" is usually as good as you're ever going to get.
those are some good points. Here are some examples that may or may not support this:
1 - We have a company formed in a Shanghai district. The company is categorized to be in the IT business. We have a favorable tax policy. Very favorable I'd say. Much better tax position than anything I've run in the U.S.
2 - We have an HK entity as well as our China entity. They actually are not legally connected except through individual owners/investors. For the most part, the HK entity gets used for money moving around outside China. The China entity gets used for all things within China. Oh yeah, we also have a U.S. LLC. Wouldn't want to dodge the U.S. for money moving around there.
I agree that if you get big, you need to spend some amount of energy ensuring you have local government patronage. But you have to be very large or very naive to run afoul of these problems. I know people that have run afoul. They were mostly being naive and not taking care of certain clear signs that could have helped. I lost millions my first couple years in Shanghai. But it wasn't because the government swooped in. It was because I could not collect from my business partners. They got paid, and when I tried to collect my share, they made excuses, dragged their feet, until I was too weak to be a big bother to them. This is very typical Chinese behavior and had nothing to do with the government. I was naive. I paid my dues and moved on.
Maybe Beijing is tougher, but Shanghai is pretty easy to run your company and handle employees correct. Sure, the rules "adjust" from time to time, but everyone is effected by rule changes so there are lots of examples for how to adjust. It does take an education and knowing whose advice to trust. I'm very fortunate that my wife is Chinese and has run several online media companies and was liaison to the gov years ago when they designed their Internet and telecom policies. So now, I do the tech work and she does the biz work and makes sure our contracts are written so we get paid and everything runs smooth. But you don't always have to marry into this. There are many solid local Chinese to partner with.
You're right that our servers are outside China. Also that businesses that need to bill in RMB are more complex to setup and it's a good idea to do things by the book. The process isn't clear cut and starting a WOFE is much more expensive than starting a business abroad.
Beijing seems less accustomed to having large foreign-owned businesses and some of the rent-seeking strata I saw in Shanghai hasn't developed as fully here. The expat community also feels a bit more integrated into society, which widens and softens the support network. The administrative issues we've run into while starting up have mostly come at us from abroad.
It does seem kind of crazy to those of us used to economies with fully developed institutions. However, China has large gaps in various institutions expected in the developed world. The ability to navigate institutional holes almost defines an entrepreneur in China.
I wrote a paper on Chinese entrepreneurship last year -- it wasn't all that good, because it's basically 20 pages about Chinese entrepreneurship without much of a coherent point, but I could post it if anyone is interested.
It's only a byproduct! You haven't lived until you went to business negotiations with Chinese guys at 11AM, went for lunch at 1PM, came back for more negotiations until 7PM. By 4AM the following day, all of you are still in your suits, sans a few missing ties and pants, sitting at a pavement somewhere and laughing like crazy. I really miss China.
I do not agree with using "pseudo-legal registration hacks" unless you really have to, that is, your business is doing things the China gov frowns upon or your biz model can't be easily classified. In years past, there was little choice. Now, its not too difficult to run a proper China Internet entity. You do need a local Chinese company to hold your Internet operating license. This is not your license for your business and real/intellectual property, this is a license for operating a server in China. This creates trust and contract issues, but there now exist trustworthy partners. I recommend to anyone wanting to target the China market to have a local Chinese business partner. It doesn't matter how smart an expat you are, the locals will always understand some things better than you.
Hosting within China does cost more. As an example of the low end of server hosting, I ran a 2U server (I owned it) for an annual fee of $1200. For that I receive an unmetered 1Mb connect. That was the contract. In reality, I was connected to the IDC's 100MB switch and nothing was managed. I never had problems. Some IDCs are better managed than others.
As for payments, if your users are paying outside China, you use a HK or other entity for those payments (you'll most likely need an HK entity anyway to comply with China regs). For payments in China, use a China bank and China payment system.
Final note: for bootstrapping and proof of concept stuff, it can make sense to crank things up in the U.S. or HK and ignore all local rules until you know more. But you should plan to clean up your China requirements as soon as possible.