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Guide - 05 November 2020

Duties and Responsibilities of Legal Representatives in China

When registering a business in China, it is required that the business appoints individuals to fulfil the roles of the legal structure of the company (hereafter also “WFOE”). This article will explain the duties and responsibilities associated with each position.

Shareholder 

The shareholder represents the highest level of authority in the company and decides the key positions which need to be appointed in the company. Both individuals and limited liability companies are allowed to own equity of a Chinese company. 

The shareholder is typically empowered to decide on the business and investment plans of the company; to appoint director(s) and supervisor(s); to review and approve the company’s annual financial budget and accounts, the profit distribution plans (or plans for making up losses); and to decide on any capital increase or decrease, mergers, divisions or dissolutions of the company. 

It is important to note that the PRC Company Law does not impose any restrictions on the nationality of the legal roles, except in certain industries such as public airlines transportation where the legal representative must be a Chinese citizen, and does not require them to reside in China. However, for some positions it is necessary to provide a Chinese mobile number or be present in person at some offices or banks. 

The key positions include the following: 

Legal Representative 

Every business established in China is required to appoint a legal representative. This person represents the company and is responsible for performing duties and powers on behalf of the company in accordance with the law and the articles of association. It is important to note that the legal representative holds a personal seal which serves as a formal signature and his/her name will be recorded on the company’s business license. 

This position is the most important role and comes with responsibility, as the individual will be held accountable for any action carried out by the China entity.  

Such responsibilities may lead to personal risks for acts and omissions by the legal representative or by the company and its employees, subject to civil, administrative, or even criminal liability. 

The legal representative should be chosen carefully as their occupational actions are also considered to be the actions of the company.  

The legal representative should also either hold the position of Executive Director (or Chairman of the board if there is a board of directors) or the general manager of the company.

Authorized Signatory 

The Authorized Signatory is the person who has the signing authority to make decisions on behalf of the shareholder. This person is appointed by the board of directors of the shareholder and is responsible for authorizing documents related to the Chinese entity such as the setup of the company and any change relating to the structure of the WFOE. The legal representative of the WFOE and the authorized signatory of the shareholder can be the same person.  

Executive Director or Board of Directors  

The Executive Director (or Board of Directors) develops and sets the agenda of the company’s operations according to the shareholder decisions.  

Besides this, the Executive Director is responsible to the shareholder for the formulation of the company’s annual financial budget and final accounts, profit distribution plans (or recovery of losses), planning of any capital increase/decrease, and company changes.  

The directors can appoint or dismiss the General Manager of the company and decide on the company’s internal management and organization. 

The Board of Directors should have no less than three directors or alternatively only one director named as Executive Director.

General Manager 

The General Manager performs the day-to-day operations of the China entity. This position shall also be registered at the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce). 

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Supervisor or Board of Supervisors

The company shall appoint a Supervisor (or a board of supervisors) whose role is to supervise the execution of company duties to ensure full compliance of rules and regulations.

The supervisor has the power to monitor the duties and actions of the directors and senior managers. In case any of their actions damages the company, the supervisor is required to rectify it. In case of any violation of laws, administrative regulations or Articles of Association that can cause losses to the company, the supervisor can start an investigation and even a lawsuit against the company. 

To ensure there is no conflict of interest, a supervisor cannot concurrently hold any other legal roles within the company. 

Financial Responsible Person 

The Financial Responsible Person is a mandatory position and usually cannot be the same person as the Legal Representative or the Executive Director. Commonly this position is covered by the company’s internal finance manager or a third-party financial services provider. 

Liabilities

The company has the power to remove a person from their appointed position in certain circumstances.  

For example, according to Article 146 of the Company Law, a person who has been sentenced to any criminal penalty, or was a former director (or manager) of a company which was bankrupted or in violation of the law, shall not assume the post of a director, supervisor, or senior manager of a new company. 

With the Chinese Corporate Social Credit System, it is important to consider that this system evaluates the behaviour of both individuals and businesses based on ratings and compliance. The credit records of a company are linked to the credit records of the persons in the positions mentioned above.

Therefore, if a company violates any regulations, this will affect the personal credit of the appointed individual and they may risk being blacklisted. As a consequence, the legal representative might not be able to be appointed as a legal representative or a director of a new company, they will not be able to buy first-class flight or train tickets or purchase real estate. If the legal representative is a foreigner, they might not be able to apply for a visa in China or to renew their visa.

Therefore, it is important to ensure that the company is fully compliant. 

Other positions

There are other positions to be defined when registering a business. They do not bear the same responsibility as the positions mentioned above. However, they have to be considered and selected carefully: 

  • A contact person for the State Administration for Market Regulation (formerly known as the State Administration for Industry and Commerce). This person is mainly responsible for the communication between the company and the SAMR authority. 
  • A bank operator for e-banking who is usually the designated accountant of the company. This person is responsible for inputting banking payment online.
  • A bank manager who is responsible for the approval of e-banking payment. This person cannot be the same person as the bank operator.  
  • A customs operator who is the person registered at the customs authority for any matter related to import/export business, custom declaration and payment. The legal representative can hold this position. 
  • A tax operator who is the designated accountant registered with the tax bureau. 
  • The branch-specific responsible person who is the main contact for the bank and tax authorities in the location where the branch is registered. 

How can Hawksford help? 

Hawksford is an established provider of company incorporation and outsourced corporate services in China. Hawksford can provide corporate governance and nominee services acting as Supervisor, Financial Responsible Person and contact person (for the State Administration for Market Regulation) of your company. Please contact us for more information. 

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