§12 · 25 tips

Starting a business: don't lose the family savings

What should you think through first before borrowing money to open a shop or a company?

Tips from this section that apply in the United States. This section describes legal rules, mostly mainland China’s. It is general information, not legal advice; for your own case, talk to a lawyer.

Start a business only with money you can afford to lose; don't touch the family's savings or borrow to open

Debts of a sole proprietor (个体户) are paid from money and property in your own name. If it can't be told whether the whole family ran the business together, the whole family's property pays. Opening a company is not a safe harbor either: when the company can't pay its debts, the investment you promised but that is not yet due can be demanded early. So decide how much to put in by this test: even if it is all lost, you can still pay the mortgage and see a doctor.

High value
Evidence B
Saves money

Don't sign a personal guarantee on a company loan, and your spouse shouldn't sign along with you

If what you sign is a "joint and several liability guarantee," then when the company can't pay, the creditor can skip the company and ask you directly. A "general guarantee" means the company is sued first, and only what is still short after its property is sold falls to you. If your spouse signs along, both people's household property is put in, and the "limited" in a limited company no longer counts for you personally.

High value
Evidence A
Saves money

Don't be a nominal shareholder, and don't hold equity on someone else's behalf

Once your name is on the register, you are legally a shareholder. The money you promised at registration must be paid on schedule, and if you don't pay, you owe the company for its losses on top of paying it in. If other shareholders did not actually pay in their money when the company was set up, you also share in repaying the shortfall. The business was run by someone else, and the debts are in your name.

Top value
Evidence A
Saves money

Sell first, build second: use presales and small orders to confirm people will buy before you put money into production

Researchers followed 116 new Italian companies for about a year. Founders who first set a hypothesis and then tested it against market feedback did better in business and were also more willing to change direction in time, and they did not give up earlier. So if no one will prepay and no one will place a small order, don't believe that "if I make it, people will come to buy."

Moderate value
Evidence B
Saves money

Once the sample is made, run it through a mass-production checklist before you start production

The difference between one sample and a thousand pieces is where the money is tied up. Yield decides the real cost. Minimum order and payment terms decide how much you must advance first. Inventory decides when the money comes back. If the product is on the compulsory certification list, it may not leave the factory or be sold without certification and the certification mark.

Moderate value
Evidence C
Saves money

Images on products, packaging, tags and promotional pictures must be made by you or bought under a license; changing the color or adding an icon doesn't make it "altered"

Changing the color, swapping the background or adding your own icon to someone else's image is still using their work without permission. Copying someone else's artwork to make money is the crime of infringing copyright (侵犯著作权罪), with up to 3 years, if you earn 30,000 CNY, do 50,000 CNY of business, or print 500 copies. On the trademark side, being "similar enough to be confused" is itself infringement.

High value
Evidence A
Keeps you free

At your post, follow procedure, and before doing a favor outside procedure, think through who bears responsibility

Take nurses as an example: the regulation says that on finding a patient in critical condition, they must notify the doctor at once, and on finding a doctor's order that breaks the rules, they must raise it with the doctor who gave it. It is the same in other posts: first see where your own procedure draws the line at "must report." The law also does not require anyone to stand by: if you voluntarily give emergency help and hurt the person, you do not have to pay compensation.

Moderate value
Evidence B
Keeps you free

Before paying someone to run your online shop, taking a shop-opening course, or doing "no-inventory" selling, ask whether more money will be demanded later and where the sales will come from

These scams take a small sum first, then keep getting you to add more through "upgrade packages," advanced payment for goods and "unfreezing fees." The orders and income in the back end may be fabricated, and when you try to withdraw, you can't. Boosting sales by fake orders is itself illegal, and a management agency that is caught is fined.

High value
Evidence B
Saves money

Mainland China only 17 tips

These tips describe mainland-China rules and do not apply in the United States; they are here for people living in China.

Pick the right legal form before opening: sole proprietors and partners are liable to the end, and only a limited company is truly "limited"
Sole proprietors and general partners are liable to the end, repaying however much is owed. Shareholders of a limited company are liable only for the amount they promised at registration. But whatever amount you promised must actually be paid in within 5 years: if you entered 1,000,000 (100万) CNY, you may owe 1,000,000 CNY. If the company's accounts and your own household accounts are mixed together, the "limited" protection can also fail.
Before joining a franchise, check the Ministry of Commerce filing, get the written disclosure, and put a "cooling-off period" in the contract
Under the rules, the brand owner must first run 2 company-owned stores for 1 year, and within 15 days after signing it must file with the commerce authority (商务部门). Before you sign, it must give you written materials covering 12 items, including the franchise fee, how the deposit is refunded, and whether existing stores make money. If you can't find a filing, they won't hand over the materials, or they want money before you can see the contract, walk away.
Before registering, settle the name, business premises, business scope and registered capital; with complete materials you can collect the license on the spot
Registration itself costs nothing, and registration fees were stopped in 2015. Only five kinds of materials are needed: the application, proof of identity or qualification, documents for the business premises, the articles of association or partnership agreement (sole proprietors don't need one), and anything else that regulations specifically name. With complete materials the license is issued on the spot, and if it can't be issued on the spot, it is done within 3 working days. The money that gets charged is mostly an agent's running-around fee.
For trades that need a permit, don't open until the permit is issued
Opening without a permit can mean, at the lighter end, an order to close, confiscation of what you earned, and a fine of up to 10,000 CNY. If what you do is exclusive-sale goods, or securities, futures, insurance or payment and settlement, then in serious circumstances it becomes the crime of illegal business operation (非法经营罪), with sentences starting at up to 5 years. Fitting out the premises before getting the permit, or trial operation before the permit is issued, is the most common misstep.
In food, first see which tier you fall into: making food and running a restaurant need a permit, selling only prepackaged food needs a filing, and selling fresh meat and vegetables needs no permit
If you make something and sell it, such as a snack shop, braised foods, baking or homemade pickles, you need a permit. Selling only fully packaged food made by someone else needs no permit, only a filing with the market regulation department at county level or above. Selling fresh meat and vegetables needs no permit. Doing it without a permit brings a fine of at least 50,000 to 100,000 CNY, which is more than the starting capital of most small businesses.
Food you put in bags to sell is prepackaged food: the label must show the production date, shelf life and ingredient list, none left out
Food that is put into packaging and then sold is called prepackaged food in law. The packaging must carry a label, with nine required items, including the production date and shelf life. Bulk food must also be marked with the name, the date and the seller's name and address. For a required item left off, if the goods are worth under 10,000 CNY, the fine is 5,000 to 50,000 CNY, and if they are worth 10,000 CNY or more, the fine is 5 to 10 times the value of the goods.
Ordinary food may not claim to cure disease: this covers labels, instructions, ads and livestream sales pitches
The labels, instructions and ads of ordinary food may not say it prevents or cures disease. Apart from the three kinds of ads for medical services, drugs and medical devices, no ad may claim to cure disease, or use words that sound like medicine. The fine is 1 to 3 times the cost of the ads. If the ad cost can't be worked out, the fine is 100,000 to 200,000 CNY. In serious cases the business license can also be revoked.
Food has a criminal line: selling meat from sick or dead animals or goods that exceed limits can be enough for a crime, and mixing in toxic or harmful substances is a crime whatever the amount, with sentences starting at up to 5 years
The earlier items are about fines. This one is about people. Selling meat from sick or dead animals, meat that failed inspection, or goods with pesticide, veterinary drug or heavy metal residues far over the limit is a crime as long as it is "enough" to cause serious poisoning. No one has to actually be made ill, and the sentence is up to 3 years. Mixing toxic or harmful non-food ingredients into food starts at up to 5 years, whatever the amount you sold.
Once you hold a license you have filing duties; with no income you must still file a zero return on time (file a form of all zeros)
Once you hold a license you must file taxes on schedule. Even if you earned nothing, you still file, with every number on the form entered as zero. For not filing, the fine is first up to 2,000 CNY, and 2,000 to 10,000 CNY in serious cases. If you file nothing for any tax for 3 months in a row, the system automatically lists you as an abnormal taxpayer and you can no longer issue invoices.
Issue invoices only for real transactions, and use the full small-scale taxpayer exemption
If you are a small-scale taxpayer paying tax under the simplified method, selling under 100,000 CNY a month or under 300,000 CNY a quarter means no value-added tax. The rate that was 3% is also cut to 1% for the same period. On the other hand, "finding someone to issue invoices to offset costs" is false invoicing (虚开), with a sentence starting at up to 3 years and a fine of 20,000 to 200,000 CNY.
Anyone claiming to be the tax bureau and pressing you to pay or file is a scammer; handle taxes only through the e-tax bureau and 12366
The tax authorities do not phone to ask for your bank card password, payment password or text-message verification code, and they do not give you an account to pay tax into. If they really come to check your books, they must show a notice of inspection and an inspection certificate. If you get a call like this, hang up first, then call 12366 (China's tax service hotline) to check. If you have already sent money, call 110 (China's police number) or 96110 (China's anti-fraud hotline) right away to have the payment stopped.
Write "deposit (定金)" and not "booking money (订金)" when you take money, state the penalty amount, and review payment terms as if you were making a loan
Only the word "定金" brings the double-return rule: if you break the contract, you don't get the money back, and if the other side breaks it, they must return double. The part above 20% of the contract amount doesn't count. If it is written as "订金," the law has no such rule. Giving payment terms is the same as lending your own money to the other side for nothing, and if they go under, it is a bad debt.
Sign a written contract within the first month of hiring, and register for social insurance within 30 days
If a person has worked a full month and no written contract has been signed, from the second month on you must pay double wages for each month, counted up to a full year. Social insurance must be registered within 30 days of starting to employ someone, and if you don't, the fine is 1 to 3 times the social insurance fees owed. The law has no item for an "employee voluntarily giving up social insurance."
Pay wages as the contract and the law require, and put raises, loans and bonuses in writing
Wages must be paid on time and in full as the contract and the law require. If they are owed, the employee can go straight to the court for a payment order. Raises, bonuses and advances that were only spoken about count for little, and if a real dispute comes, the side without evidence loses out. If you lend your own money to an employee, write a proper IOU stating the amount, the interest and when it is to be repaid.
For each batch you buy, keep the paperwork and the supplier's details, and don't buy goods priced well below market: when an employee buys fakes, the owner is the one convicted
Selling fakes is enough for a sentence of up to 3 years if you earn 30,000 CNY or sell 50,000 CNY worth. Goods left unsold in the warehouse also count. "I didn't know they were fake" is not for you to decide: if your purchase price is clearly below the market price and you can't explain why, you will be found to have known. Keeping the purchase contract, invoice, payment record and the supplier's details is what leaves you a route to avoid paying damages.
If the business loses money, exit by the proper procedure: deregister by the simplified route if you can, go through bankruptcy if you are insolvent, and don't leave it unattended
If you have no debts and owe no wages, taxes or social insurance, all investors sign a written commitment, and if no one objects during 20 days of public notice, you can use simplified deregistration (简易注销). Sole proprietors need no notice, and are deregistered directly if no one objects within 10 days. If you can't pay your debts, apply for bankruptcy. If a business is left unattended, files no annual report for 2 years and can't be reached, its license is revoked, and the legal representative responsible can't serve as a legal representative again for 3 years.
If you run a company or a sole proprietorship, file last year's annual report online between January 1 and June 30 each year, even with no business; the annual report is free
Companies and sole proprietors must file the previous year's annual report online once a year, in the first half of the year. If you don't, you go on the list of abnormal business operations, and after filing late you can apply to be removed from it. The annual report is free. Anyone who phones to say you missed the filing and tells you to pay an agent through a mini-program or official account is a scammer, and people have been sentenced to 10 years or more for it. First check the publicity system yourself.