Managing a company

Company's registration

Registration of a Company

Company registration in China involves a series of well-defined steps and regulatory requirements.

Pre-registration Considerations

Before beginning the registration process, investors must decide about these important points:

Business Scope: Clearly defining the company’s business scope is critical as it determines what activities the company is legally permitted to engage in. The business scope must be carefully drafted and approved by the authorities.
Registered Capital: Investors should determine the appropriate amount of registered capital based on the business plan and regulatory guidelines. The registered capital must be paid within five years after the Company registration.
Company Name: The company name must be unique and approved by the local Administration for Market Regulation (AMR). The name should typically include the location, trade, industry, and organizational form.

Company Name Pre-Approval

The first official step is obtaining the pre-approval of the company name from the local AMR. The process involves:

Submitting several proposed names in order of preference.
Awaiting approval, which generally takes 3-5 working days.
Upon approval, the name reservation is valid for six months.

Drafting and Submitting Documents

The following documents must be prepared and submitted to the AMR:

Articles of Association: A critical document outlining the company’s governance structure, capital contributions, profit distribution, and other key aspects.
Shareholder and Director Information: Details of shareholders, directors, and the legal representative, including identification documents.
Lease Agreement: Proof of the company’s registered address, usually in the form of a lease agreement or ownership certificate.

Company Registration with AMR

Once all required documents are prepared, they are submitted to the local AMR. The process involves:

Application Submission: All documents, including the company name pre-approval, Articles of Association, and others, must be submitted.
Review and Approval: The AMR reviews the application, which usually takes 5-10 working days.
Issuance of Business License: Upon approval, the AMR issues a business license, which officially marks the establishment of the company.

Post-Registration Procedures

After obtaining the business license, several additional steps must be completed:

Carving Company Seals: The company must carve official seals (company chop, financial chop, legal representative chop, etc.), which are essential for conducting business.
Opening a Corporate Bank Account: A bank account must be opened with a Chinese bank. This account is used for all business transactions, including capital injection and tax payments.
Tax Registration: Although tax registration is now integrated with the business license, companies must still complete some post-registration procedures with the local tax bureau, including obtaining the tax identification number and registering for Value-Added Tax (VAT).
Social Insurance Registration: Companies must register with the social insurance bureau to make contributions for employees' social security benefits.
Foreign Exchange Registration (for FIEs): If the company is foreign-invested, it must register with the State Administration of Foreign Exchange (SAFE) to manage foreign currency transactions and capital account funds.

Special Licenses and Permits

Depending on the industry and business scope, additional licenses or permits may be required:

Industry-Specific Licenses: Certain sectors, such as food and beverage, pharmaceuticals, and education, require specific operating licenses.
Environmental Approvals: Businesses that may impact the environment must obtain environmental clearance from relevant authorities.

Compliance with the Negative List (for Foreign Investors)

Foreign investors must ensure that their business activities are not restricted or prohibited under China’s “Negative List” for foreign investment. If the proposed activities fall under restricted categories, special approvals or joint ventures with Chinese partners may be required.

Conclusions

Once all procedures are complete, the company can legally commence operations. Compliance with ongoing obligations, such as annual reporting, tax filings, and maintaining proper financial records, is crucial for continued legality and operational success. Key points to consider:

The process can be time-consuming, especially for foreign investors, and involves significant paperwork.
Local authorities may have specific requirements or procedures that vary slightly from region to region.
Professional assistance from a legal or corporate advisory firm is often advisable to navigate the complexities of Chinese business regulations.

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Corporate governance

Corporate governance for a limited liability company (LLC) in China is governed primarily by the Company Law of the People's Republic of China.

The governance structure

The governance structure includes the shareholders, board of directors, supervisors, and the legal representative. An LLC in China typically has the following governance bodies:

Shareholders’ Meeting: The highest authority within the company, responsible for major decisions.
Board of Directors (or Executive Director): Responsible for managing and making decisions on company affairs.
Supervisors or Supervisory Board: Responsible for overseeing the actions of the board of directors and senior management to prevent fraud or abuse.
Legal Representative: A key individual who acts on behalf of the company and holds significant legal authority.

Shareholders’ Meeting

Role and Authority

The shareholders’ meeting is the supreme decision-making body of the company.
It has the authority to appoint or dismiss directors, supervisors, and the legal representative.
It approves major company policies, financial decisions, profit distribution, and amendments to the Articles of Association.

Procedures for Decision-Making

Meeting Convening: Regular meetings must be held annually, while extraordinary meetings can be called as needed.
Quorum and Voting: Decisions typically require a majority vote unless otherwise stipulated in the Articles of Association. For major decisions, such as amendments to the Articles or the dismissal of directors, a two-thirds majority may be required.

Board of Directors

Role and Composition

The board of directors is responsible for executing the decisions made by the shareholders’ meeting and managing the company's operations.
An LLC must have 3-13 directors, but small companies can have a single executive director instead of a board.
The board typically includes a chairman who leads the board meetings.

Appointment and Dismissal of Directors

Appointment: Directors are appointed by the shareholders’ meeting. Their term is generally three years but can be re-elected upon expiration.
Dismissal: The shareholders’ meeting can dismiss a director before their term ends, usually through a resolution passed by a majority vote. This requires a valid reason and adherence to any relevant procedures in the Articles of Association.

Supervisory Board or Supervisors

Role and Function

The supervisory board (or individual supervisors) is responsible for overseeing the company’s financial affairs and the conduct of the directors and senior management.
Supervisors have the right to inspect company accounts and take corrective actions if necessary.

Appointment and Dismissal of Supervisors

Appointment: Supervisors are appointed by the shareholders. If a supervisory board is used, it typically consists of at least three members, including representatives from employees.
Dismissal: Like directors, supervisors can be dismissed by the shareholders’ meeting, following the procedures outlined in the Articles of Association.

Legal Representative

Role and Significance

The legal representative is the company’s most critical executive and is legally responsible for the company’s actions.
This person is typically the chairman of the board, the executive director, or the general manager.

Appointment of the Legal Representative

Procedure: The legal representative is appointed by the board of directors or shareholders’ meeting, depending on the company’s governance structure.
Filing Requirement: Once appointed, the legal representative’s details must be filed with the local Administration for Market Regulation (AMR). The legal representative’s name appears on the business license.

Dismissal and Replacement of the Legal Representative

Grounds for Dismissal: A legal representative can be dismissed for misconduct, failure to perform duties, or at the discretion of the shareholders or board, as long as it adheres to the company’s Articles of Association.
Procedure:
1. Board/Shareholders’ Resolution: the decision to dismiss and replace the legal representative must be made through a formal resolution.
2. Notification and Approval: the decision must be reported to the AMR, and a new legal representative must be appointed.
3. Updating Registration: the change must be registered with the AMR, and a new business license reflecting the change will be issued. This process typically involves submitting the resolution, identity documents of the new legal representative, and the amended Articles of Association.

General Manager

Role

The general manager, if appointed, oversees daily operations and reports to the board of directors. The general manager may also serve as the legal representative or a director.

Appointment and Dismissal

Appointment: The general manager is appointed by the board of directors or executive director.
Dismissal: The board of directors can dismiss the general manager, often based on performance or policy changes. The process typically requires a formal resolution.

Conflict Resolution

In the event of disputes between shareholders, directors, or supervisors, the company’s Articles of Association should outline procedures for resolving conflicts.
If internal mechanisms fail, parties may resort to arbitration or litigation as allowed by Chinese law.

Compliance and Reporting

All changes in directors, supervisors, and the legal representative must be reported to the AMR within 30 days of the change.
Non-compliance with corporate governance rules can result in penalties, legal liabilities, and, in severe cases, deregistration of the company.

Company’s seals

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Company’s seals

In China, company seals (also known as chops) play a crucial role in the daily operations and legal activities of a business. They carry significant legal weight, often more than a signature. Each seal has a specific function, and their use is strictly regulated.

Types of Company Seals and Their Functions

Official Company Seal (Company Chop, 公司公章)
- Function: This is the most important seal and is used for all official company documents, contracts, and correspondence. It represents the authority of the company and is legally binding.
- Appearance: Typically round with the company’s name in Chinese characters and the company’s registration number.
- Usage: Required for signing contracts, company resolutions, banking documents, tax filings, and other significant corporate activities.
Legal Representative Seal (法人章)
- Function: Represents the legal representative of the company. It is used for high-level approvals, important financial transactions, and legal documents.
- Appearance: Usually oval or rectangular, bearing the name of the legal representative.
- Usage: Used for opening bank accounts, signing checks, and high-level documents that require the legal representative's approval.
Finance Seal (财务章)
- Function: Used for financial transactions, such as issuing checks, processing bank transactions, and handling tax-related documents.
- Appearance: Often round with the company’s name and “财务专用章” (meaning "Finance Seal").
- Usage: Required for issuing invoices, managing company bank accounts, and financial paperwork.
Contract Seal (合同章)
- Function: Specifically used for stamping contracts. This seal is optional but commonly used to distinguish contract execution from other business operations.
- Appearance: Similar to the official company seal, but may include the words “合同专用章” (meaning "Contract Seal").
- Usage: Used exclusively for company contracts and agreements.
Invoice Seal (发票章)
- Function: Used for issuing and validating company invoices (fapiao). It is mandatory for all companies issuing invoices in China.
- Appearance: Round, usually marked with “发票专用章” (meaning "Invoice Seal") and the company’s name.
- Usage: Required for stamping all official invoices issued by the company.

Company’s liquidation

The dissolution and liquidation of a company in China is a complex process governed by the Company Law of the People's Republic of China, the Enterprise Bankruptcy Law, and other relevant regulations. The process involves several stages, including decision-making, filing with authorities, debt settlement, asset distribution, and deregistration.

Reasons for Company Dissolution

A company in China can be dissolved for various reasons, including:

Voluntary Dissolution: Initiated by the shareholders when the company has fulfilled its business purpose, the shareholders decide to cease operations, or the duration of the company as stipulated in the Articles of Association has expired.
Mandatory Dissolution: Ordered by the authorities due to serious violations of law, revocation of the business license, or if the company is unable to continue operations due to financial or legal issues.
Merger or Split: The company is dissolved due to a merger with another entity or a split into multiple entities.
Bankruptcy: The company is unable to pay its debts and is declared bankrupt by a court.

Decision-Making and Initial Procedures

Shareholders’ Resolution:
- Voluntary Dissolution: A resolution must be passed by the shareholders’ meeting. This typically requires a two-thirds majority vote unless the Articles of Association specify a different requirement.
- Documentation: The resolution must clearly state the reasons for dissolution and appoint members of the liquidation committee.
Liquidation Committee Formation:
- Appointment: Upon deciding to dissolve the company, the shareholders must form a liquidation committee within 15 days. The committee is usually composed of shareholders, directors, or other appointed individuals.
- Role of the Liquidation Committee: The committee is responsible for managing the liquidation process, including asset valuation, debt settlement, and distribution of remaining assets.
Public Announcement:
- The company must publish a public announcement in a newspaper recognized by the local Administration for Market Regulation (AMR) within 60 days of the decision to dissolve. This announcement informs creditors of the dissolution and instructs them to declare their claims within a specified period (usually 45 days).

Liquidation Process

Asset Inventory and Valuation:
- The liquidation committee is responsible for preparing an inventory of the company’s assets, liabilities, and contracts. This includes a detailed valuation of all assets.
- The committee must also notify known creditors in writing about the dissolution and invite them to file claims.
Debt Settlement:
- Priority of Payments: The company’s debts are settled in the following order:
  1. Liquidation Expenses: Costs related to the liquidation process, including legal and administrative fees.
  2. Employee Wages and Social Security: Outstanding salaries, benefits, and social insurance contributions.
  3. Taxes: Unpaid taxes and related penalties.
  4. Secured and Unsecured Creditors: Any remaining funds are used to settle debts with secured creditors first, followed by unsecured creditors.
- Negotiations: The liquidation committee may negotiate with creditors to settle debts, including reaching agreements for partial payment or debt forgiveness.
Asset Disposal:
- Sale of Assets: The liquidation committee may sell off the company’s assets to raise funds for debt repayment. The sale of assets must be conducted in a fair and transparent manner.
- Distribution of Remaining Assets: After settling all debts, any remaining assets are distributed among the shareholders according to the Articles of Association or proportionate to their capital contributions.

Deregistration and Filing with Authorities

Final Liquidation Report:
- After completing the liquidation process, the liquidation committee must prepare a final liquidation report, which includes detailed accounts of the liquidation activities, asset distribution, and debt settlement.
- The report must be approved by the shareholders or the court (in case of bankruptcy) before proceeding with deregistration.
Tax Clearance:
- The company must undergo a tax audit conducted by the local tax bureau. The audit ensures that all taxes have been settled, and no liabilities remain.
- Upon completion of the audit, the company receives a tax clearance certificate, which is required for deregistration.
Deregistration with the Administration for Market Regulation (AMR):
- Application: The liquidation committee submits an application for deregistration to the AMR, along with the final liquidation report, tax clearance certificate, and other required documents.
- Review and Approval: The AMR reviews the application and, if satisfied, approves the deregistration, effectively terminating the company’s legal existence.
- Cancellation of Seals: The company must return and cancel all official company seals (chops) with the Public Security Bureau.
Cancellation of Bank Accounts and Licenses:
- The company must close all corporate bank accounts and cancel any special licenses, permits, or registrations obtained during its operation.
- The company must also deregister with the Social Insurance Bureau, Customs, SAFE (State Administration of Foreign Exchange), and other relevant authorities.

Bankruptcy Liquidation (if applicable)

If a company is insolvent and cannot repay its debts, it may enter into bankruptcy proceedings:

Filing for Bankruptcy: The company or creditors can file a petition for bankruptcy with the local People’s Court.
Court Appointment of a Liquidator: The court appoints a liquidator to manage the bankruptcy liquidation, which follows similar procedures as voluntary liquidation but under the supervision of the court.
Creditor Meetings: Creditors are invited to meetings to discuss and approve the liquidation plan.

6. Legal and Compliance Considerations

Liability of the Liquidation Committee:
- Members of the liquidation committee have a fiduciary duty to act in the best interest of the company and its creditors. Failure to do so may result in personal liability.
- If the liquidation committee fails to perform its duties, creditors or interested parties can request the court to intervene.
Statutory Time Limits:
- The entire dissolution and liquidation process should be completed within a reasonable timeframe. Delays or negligence can result in fines or other legal consequences.
Legal Challenges and Disputes:
- Creditors or shareholders may challenge the actions of the liquidation committee if they believe the process was not conducted fairly or legally. Disputes may be resolved through negotiation, arbitration, or litigation.

Corporate Taxation

China imposes several types of taxes on companies, with Corporate Income Tax (CIT) being the most significant. Chinese tax system is governed by the State Taxation Administration (STA) and local tax bureaus.

The taxes on companies are:

Corporate Income Tax (CIT): 25% standard rate.
Value-Added Tax (VAT): Ranges from 6% to 13% depending on goods/services.
Withholding Tax: 10% on dividends, royalties, and interest paid to non-residents.
Other Taxes: Business tax, environmental protection tax, stamp duty, etc.

Corporate Income Tax (CIT)

Standard Rate:
- 25% on worldwide income for resident companies.
Reduced Rates:
- 15% for qualified high-tech enterprises.
- 20% for small and low-profit enterprises.
Taxable Income:
- Calculated as total revenue minus allowable deductions, losses, and exemptions.
- Common deductions include operating expenses, wages, depreciation, and interest payments.

Value-Added Tax (VAT)

Overview:
- A major source of revenue, applied to the sale of goods and services.
Rates:
- 13% for general goods, 9% for certain goods/services, 6% for modern services.
Filing:
- Monthly or quarterly filing depending on the size of the business.
- Input VAT can be credited against output VAT.

Withholding Tax

Applicability:
- Levied on non-resident companies earning income from China.
Rate:
- 10% standard rate, can be reduced under Double Taxation Agreements (DTAs).
Types of Income:
- Dividends, royalties, interest, and capital gains.

Main Tax Obligations During the Financial Year

a. Monthly/Quarterly Tax Filings

Corporate Income Tax (CIT) Advance Payments:
- Based on quarterly profit estimates, with a final reconciliation at year-end.
VAT and Additional Taxes:
- Monthly or quarterly returns must be filed.
Withholding Tax Returns:
- Filed when payments subject to withholding tax are made.

b. Annual Tax Return and Final Settlement

Annual CIT Return:
- Must be filed by May 31st of the following year.
- Reconciliation of quarterly payments with actual income and expenses.
Annual VAT Return:
- A summary of the monthly/quarterly filings for the year.
Statutory Audit Requirement:
- Required for all Foreign-Invested Enterprises (FIEs) and large enterprises.
- Audit reports must be completed by April 30th.

Additional Compliance Requirements

a. Transfer Pricing Documentation

Requirement:
- Companies with cross-border transactions must prepare documentation justifying pricing policies.
Documentation Deadline:
- Submitted with the annual CIT return if requested by the tax authorities.

b. Tax Residency Certificate

Purpose:
- Obtain for DTAs benefits and avoid double taxation.
Application:
- Required for Chinese companies seeking tax benefits abroad.

c. Local Compliance

Environmental Taxes:
- Applicable based on pollution levels.
Social Security Contributions:
- Companies must contribute to employee social security funds monthly.

Penalties and Non-Compliance

Late Filing Penalties:
- Fines and interest on unpaid taxes.
Audit and Investigations:
- Tax authorities may conduct audits; penalties for underpayment or evasion can be severe.
Criminal Liability:
- Severe cases of tax evasion can lead to criminal charges.

Protection of personal data

China's Personal Information Protection Law (PIPL), which came into effect on November 1, 2021, is a comprehensive law designed to protect personal information (PI) and regulate its processing. Companies operating in China must comply with this law to avoid significant penalties, which can include hefty fines, suspension of operations, or even revocation of business licenses. Below is a detailed description of the key rules, requirements, and procedures under the Personal Information Protection Law (PIPL) that companies must consider:

Scope of the Law

The PIPL applies to the processing of personal information within China as well as to entities outside China that process personal information of individuals located in China. It covers the entire lifecycle of personal data, including collection, storage, use, processing, transmission, provision, and disclosure.

Legal Basis for Data Processing

Companies must have a legal basis for processing personal information. The permissible grounds include:

Consent: Companies must obtain explicit, informed consent from individuals before collecting their personal information. Consent should be freely given and can be withdrawn at any time.
Contractual Necessity: Data processing necessary for the performance of a contract in which the individual is a party.
Legal Obligations: Processing required to fulfill legal obligations.
Public Interest: Processing necessary for the public interest.
Legitimate Interests: Processing for the legitimate interests of the data controller, provided it does not infringe on the rights and interests of individuals.

Sensitive Personal Information

Sensitive personal information (SPI) includes data such as biometrics, religious beliefs, medical records, financial accounts, and personal information of minors. Companies must take additional steps when processing SPI:

Separate Consent: Explicit and separate consent is required for processing SPI.
Risk Assessment: A Personal Information Protection Impact Assessment (PIPIA) must be conducted before processing SPI to evaluate potential risks.

Cross-Border Data Transfers

If a company needs to transfer personal information outside of China, it must comply with specific requirements:

Security Assessment: A security assessment conducted by the Cyberspace Administration of China (CAC) is required for transfers that involve large volumes of data or critical data.
Contractual Obligations: Companies can use standard contracts approved by the CAC or participate in a recognized certification scheme.
Informed Consent: Companies must inform individuals about the details of the cross-border transfer and obtain their separate consent.

Individual Rights

Individuals are granted several rights under the PIPL, and companies must ensure they can exercise these rights:

Right to Access: Individuals can request access to their personal information.
Right to Correction: Individuals can request the correction of inaccurate or incomplete information.
Right to Deletion: Individuals can request deletion of their data under certain conditions, such as when the data is no longer necessary for the purposes for which it was collected.
Right to Data Portability: Individuals can request their data in a portable format.
Right to Restrict Processing: Individuals can limit how their data is processed in certain situations.

Data Security and Protection

Companies must implement stringent data protection measures to safeguard personal information:

Data Minimization: Companies should only collect and process the minimum amount of personal information necessary for the intended purpose.
Security Measures: Companies must implement technical and organizational measures to protect personal information from unauthorized access, leakage, modification, or loss.
Data Breach Notification: In the event of a data breach, companies must notify the relevant authorities and affected individuals promptly.

Compliance Obligations

Companies are required to fulfill specific compliance obligations, including:

Appointment of a Data Protection Officer (DPO): Companies that process large volumes of personal information must appoint a DPO and report their contact information to the relevant authorities.
Regular Audits: Companies must conduct regular audits of their data processing activities to ensure compliance with the PIPL.
Record Keeping: Companies must maintain records of their data processing activities, including the purposes of processing, the types of data processed, and any cross-border transfers.

Penalties for Non-Compliance

The PIPL imposes severe penalties for non-compliance:

Fines: Companies can face fines of up to 5% of their annual turnover or 50 million yuan (approximately USD 7.7 million), whichever is higher.
Business Suspension: Authorities can suspend the company’s operations or revoke its business license for serious violations.
Blacklisting: Violators may be placed on a national blacklist, which could restrict future business operations.

Implementation and Best Practices

To comply with the PIPL, companies should:

Conduct comprehensive data mapping to understand what personal information they collect and process.
Review and update privacy policies to align with the PIPL’s requirements.
Establish clear procedures for responding to data subject requests.
Ensure that consent mechanisms are transparent and easy for individuals to understand.
Provide regular training to employees on data protection practices and legal obligations.

Managing a company

Registration of a Company

Liquidation of a Company

Corporate governance

Corporate Taxation

Company’s seals

Protection of personal data

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