For all of us (foreign) ‘locals’ in Beijing, we have seen the massive growth in foreign-owned restaurants over the past several years. Not only are such establishments popular (and very profitable), they are adding to the international cuisine and outlook of the nation’s capital. In this article, we outline the various procedures required to establish a restaurant. (There are alternatives in establishing a management office first, then a restaurant as a branch of the office; however, we will discuss this in later articles.)
2. BUSINESS ENTITY
In order to establish a restaurant, the owner must decide what type of entity will own and operate the establishment. In China, this is much more difficult than in other markets such as the US, where individuals can own and operate businesses. Fortunately, the restaurant industry is quite open and the operating entity may be either a Wholly Foreign Owned Enterprise (WFOE) (owned by a company or individual) or a Joint Venture (JV) (if partnering up with a Chinese national), though it is not possible for a foreigner to own the restaurant business directly as a sole proprietorship. Further, to open a restaurant, there are additional licenses and approvals that are necessary in addition to the traditional requirements of a limited liability company. However, once the company is set up with the proper business scope and registered capital, it can be used to open additional branches, though, of course, each branch will require certain approvals for that specific location (see below Health and Hygiene, Environmental Impact, etc.)
Unless there are compelling reasons otherwise, such as locating and trusting a suitable Chinese partner, the WFOE, a limited liability company wholly owned by the investor, is the likely choice for foreigners, as it offers the most autonomy. Although previously quite common and unfortunately still prevalent, for the sake of simplicity, many foreigners opt to allow Chinese partners to open the restaurant as a domestic (Chinese) company. In this case, the Chinese partner(s) will be sole shareholder(s) of the company, leaving the foreign investor with no legal ownership rights. (Given the often very large upfront personal investment, we caution investors to consider the appropriateness of such an ownership structure.)
3. Initial Procedures (Unique to Restaurants)
In chronological order, the following procedures must take place prior to establishment of the business entity, itself:
i) Apply and obtain company name approval notification with the Beijing Administration of Industry and Commerce (BAIC)
The name (in Chinese) will be in composed of, and in the following order:
Part 1 - City of WFOE: In this case it would be: Beijing; Part 2 – Company name (i.e. Bill’s BBQ); Part 3 - Business type (i.e. Restaurant); Part 4 - Form of organization (i.e. Limited Liability Company).
All together, the Registered Chinese name would read: Beijing Bill’s BBQ Restaurant Co., Ltd.
It is advisable that the applicant chooses at least three names to be checked for availability. The company name should be consistent with the actual business type, and should not explicitly or implicitly step beyond the scope of business.
ii) Selecting a Restaurant Location
The location of the restaurant is obviously important from a business standpoint, but based on the Beijing Municipal Environmental Protection Bureau’s (BMEPB) regulations if the restaurant is located near residential areas (within 50 meters), the residents will need to approve. At this point there are no regulations defining “approval by the residents”, and, currently, the BMEPB has found the following to be sufficient (depending on the circumstances): survey or completed questionnaire of residents, and approval letter by the local residents association.
iii) Apply and Obtain Health and Food Hygiene License with the Municipal Health Bureau
iv) Alcohol Permit Registration
Various documentation must be furnished, including but not limited to the location and site map of the restaurant and the restaurant’s internal health and safety rules. Within 10 days of the documents submission, the Health Bureau will notify applicant and arrange the on-site inspection. The primary areas of inspection will include the hygiene and safety of; 1) raw foods preparation area; 2) kitchen area; 3) employee changing area; 4) faucet and sink area; and 5) waste disposal area. Inspectors should provide an on-the-spot list of non-compliance and recommendations to remedy the situation. For certain minor problems, a submission of a photo by the applicant of the modified area should suffice, so as to not require a second visit by the inspector. Notification of approval, assuming all areas of inspection do not require repeat visits, should be within 20 days.
v) Environmental Protections (EP) Examination and Approval (District Level)
Though the registration of Alcohol Permit will not be completed until after issuance of the business license, Tax Registration Permit, and Health and Food Hygiene License, the applicant will need to reflect its intent to sell alcohol in the Health and Hygiene application. The Health and Food Hygiene License application will need to include the approved wording in the business scope to note that it will sell alcohol.
Restaurant applications do not require a separate EP Impact Report. The two forms required include: 1) Environmental Impact Application form – to be completed by the applicant; and 2) Environmental Impact Report Form – to be completed and stamped by an authorized environmental evaluation entity.
The Report Form shall primarily examine, among others, the following: an environmental evaluation of the indoor and outdoor surroundings and near by building, an environmental analysis of the site, potential and future environmental impact of the surroundings, and recommendations for environmental protection. The primary focus of the environmental impact application is to assess potential and actual noise and water pollution, fire protection, and waste disposal of the site.
In selecting a restaurant location (see above) it is important to note that the outdoor smoke ventilation exhaust fixture shall be located at least 20 meters from any residence or above any residential area.
vi) No Tobacco Permits
As of March 2007, the laws state that foreign commercial enterprises are not allowed to sell tobacco related products. Those foreign enterprises currently selling tobacco will not be permitted to sell these products after their permits expire in late 2008.
4. Establishing the Entity: WFOE or JV
i) Apply for Approval Certificate
Once all the above approvals are obtained, they shall be submitted with the articles of incorporation, and feasibility report (along with supporting documentation) in order to obtain the Letter of Approval with the Beijing Municipal Bureau of Commerce.
ii) Registered Capital
The registered capital is the stated amount of capital that will be invested in the business. The registered capital will be reflected in the company’s articles of association, and recorded with the relevant government authorities. Since the entire amount of the registered capital must be invested (subject to cancellation), it is a very important legal and business decision.
Though the minimum amount of registered capital, based on the Company Law, may be as low as RMB 30,000, this will definitely not be applicable for restaurant companies.
Note that the investor is allowed to contribute non-monetary registered capital, among other things, in the form of technology/intellectual property rights. Cash contribution to registered capital may not be less than 30%.
iii) Capital Contribution
Capital contribution may be made through a lump sum payment or by installments. The lump sum shall be paid within 90 days from the issuance of the temporary business license. If paying by installments, a minimum 20% shall be paid within 90 days. The total amount shall be paid off within 1 year from the date of the establishment of the company.
iv) Apply and Obtain Temporary Business License with Beijing Administration for Industry and Commerce
v) Additional Certificates to obtain Permanent business License
With the Certificate of Approval, the applicant may apply and obtain the temporary business license. The restaurant cannot begin operations at this point.
Once the temporary business license is issued, the applicant may apply for the various approval certificates and the injection of capital. Before the permanent business license the applicant must obtain the following certificates, reports, and take care of the following banking issues:
- Organization Code Registration Certificate with the Organization Code Bureau;
- Tax Registration Certificate with the Taxation Bureau;
- Statistics Registration Certificate with the Statistics Bureau;
- Foreign Exchange Registration Certificate with the Foreign Exchange Supervision Bureau;
- Exit-Entry Administration Bureau of the Public Security Bureau registration
- Open RMB Basic Bank Account with the Designated Bank;
- Open Foreign Currency Capital Bank Account with a Designated Bank;
- Inject capital after the opening of Foreign exchange capital bank account by the client; and
- Capital Verification Report with a Chinese CPA firm.
vi) Permanent Business License with the BAIC
With the permanent business license issued the restaurant will be legally established and can fully operate within the business scope.
5. Other Issues
i) Logo / Trademark Registration
As China is a first-to-file jurisdiction, the general rule is to register any trademarks as soon as possible, basically meaning whoever files first is presumed to be the trademark holder. The company logo, and the Chinese and English names can be registered with the China Trademark Office.ii) Carve Company Chop (seal), and other related chops Once the business license is issued, and the company has registered with the Exit-Entry Administration Bureau of the Public Security Bureau, the applicant can apply for the chops of the company, the legal representative and other related chops with the Public Security Bureau. They will designate an authorized carving seal agent to carve the chops. iii) Other Applications and Registration
- Register business license with the district Administration for Industry and Commerce and with the district Municipal Bureau of Commerce
- Finance Registration Certificate with the Finance Bureau
- Customs Registration Certificate with the Customs Bureau
All foreign investors setting up a business in China will be presented with many obstacles. Establishing a restaurant will add many other variables to the issues involved. Proper planning, professional advice and set-up can reduce and avoid unnecessary delays and risks, so that the business can begin to operate and generate income.
Stephen Lou, foreign counsel with Grandall Legal Group is part of the International Practice Group. His practice involves international corporate and commercial transactions, including FDI, franchising, mergers and acquisitions and general corporate matters. Stephen received his JD from the Santa Clara University School of Law, and is admitted to the California bar. He is a standing member of China Chain Store & Franchise Association. You can contact Stephen at [email protected] or learn more about the firm at www.grandall-profile.com.