Setting-up and managing a company in China
Registration of a company
Company registration in China involves a series of procedures and requirements.
The corporate governance
Shareholders, Board of Directors, Supervisors, Legal Representative, General Manager.
Chinese company’s seals
Company seals (also known as chops) play a crucial role in the daily operations in China.
Registration of a Company in China
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.
The corporate governance in a Chinese company
The 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:
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Shareholders’ Meeting: The highest authority within the company, responsible for major decisions.
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Board of Directors (or Executive Director): Responsible for managing and making decisions on company affairs.
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Supervisors or Supervisory Board: Responsible for overseeing the actions of the board of directors and senior management to prevent fraud or abuse.
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Legal Representative: A key individual who acts on behalf of the company and holds significant legal authority.
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Shareholders’ Meeting
Role and Authority
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The shareholders’ meeting is the supreme decision-making body of the company.
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It has the authority to appoint or dismiss directors, supervisors, and the legal representative.
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It approves major company policies, financial decisions, profit distribution, and amendments to the Articles of Association.
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Procedures for Decision-Making
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Meeting Convening: Regular meetings must be held annually, while extraordinary meetings can be called as needed.
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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.
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Board of Directors
Role and Composition
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The board of directors is responsible for executing the decisions made by the shareholders’ meeting and managing the company’s operations.
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An LLC must have 3-13 directors, but small companies can have a single executive director instead of a board.
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The board typically includes a chairman who leads the board meetings.
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Appointment and Dismissal of Directors
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Appointment: Directors are appointed by the shareholders’ meeting. Their term is generally three years but can be re-elected upon expiration.
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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.
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Supervisory Board or Supervisors
Role and Function
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The supervisory board (or individual supervisors) is responsible for overseeing the company’s financial affairs and the conduct of the directors and senior management.
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Supervisors have the right to inspect company accounts and take corrective actions if necessary.
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Appointment and Dismissal of Supervisors
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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.
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Dismissal: Like directors, supervisors can be dismissed by the shareholders’ meeting, following the procedures outlined in the Articles of Association.
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Based on China’s Revised Company Law (in effect from July 1, 2024), Limited Liability Companies (LLCs) can choose to not have the supervisory board or even individual supervisors if all shareholders unanimously agree.
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Legal Representative
Role and Significance
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The legal representative is the company’s most critical executive and is legally responsible for the company’s actions.
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This person is typically the chairman of the board, the executive director, or the general manager.
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Appointment of the Legal Representative
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Procedure: The legal representative is appointed by the board of directors or shareholders’ meeting, depending on the company’s governance structure.
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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.
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Dismissal and Replacement of the Legal Representative
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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.
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Procedure:
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Board/Shareholders’ Resolution: the decision to dismiss and replace the legal representative must be made through a formal resolution.
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Notification and Approval: the decision must be reported to the Administration for Market Regulation (AMR), and a new legal representative must be appointed.
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Updating Registration: the change must be registered with the Administration for Market Regulation (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.
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General Manager
Role and Function
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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.
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Appointment and Dismissal
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Appointment: The general manager is appointed by the board of directors or executive director.
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Dismissal: The board of directors can dismiss the general manager, often based on performance or policy changes. The process typically requires a formal resolution.
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Conflicts and Reporting
Conflict Resolution
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In the event of disputes between shareholders, directors, or supervisors, the company’s Articles of Association should outline procedures for resolving conflicts.
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If internal mechanisms fail, parties may resort to arbitration or litigation as allowed by Chinese law.
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Compliance and Reporting
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All changes in directors, supervisors, and the legal representative must be reported to the Administration for Market Regulation (AMR) within 30 days of the change.
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Non-compliance with corporate governance rules can result in penalties, legal liabilities, and, in severe cases, deregistration of the company.
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Chinese Company’s seals
In China, company seals (also known as chops) play a crucial role in the daily operations and legal activities of a company. 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.
