Introductory Business Guide: China's Legal Overview
In 2019, Interlegal published its first joint book called Legal and Tax Issues Around the World - Starting and Growing a Business. It is the result of collective work with the accountants' firms network EuraAudit. This article aims to introduce the legal environment of China for entrepreneurs who are interested in forming and financing their business in this country. Note that it is not equivalent to a complete professional analysis. Through this introductory guide, the network intends to help entrepreneurs to craft the questions they need to ask themselves in order to start, operate, and see their business thrive on the global stage. Therefore, Interlegal encourages entrepreneurs to obtain legal advice with HJM Asia Law & Co LLC's firm on the issues arising from starting and running a business in China.
Establishment of Enterprises
A limited-liability company (LLC) is defined as a company where the shareholders’ liabilities are limited to the capital they contributed to the company.
The number of shareholders shall not be more than 50.
Composition. The shareholders’ meeting is composed of all shareholders.
Board of Directors
Composition. The board of directors of an LLC comprises of a minimum of three and a maximum of 13 members, unless it is otherwise provided for in article 50 of the Company Law, under which one executive director replaces the board of directors.
The board of directors of an LLC may comprise of the representatives of the employees of the company concerned. The employees’ representatives who are to serve as directors must be democratically elected by the employees of the company by the general meeting of the representatives of the employees, an employees’ meeting, or in any other way. Non-representative directors must be appointed at the shareholders’ meeting.
The board of directors has one board chairman and may have one or more deputy chairmen. The appointment of the chairman and deputy chairman must be prescribed in the articles of association.
Function. The board of directors should report and be accountable to the shareholders.
Composition. An LLC must have a board of supervisors, consisting of at least three supervisors. However, a small LLC or an LLC with a relatively small number of shareholders may be permitted to have one or two supervisors instead of a board of supervisors.
The board of supervisors must include representatives of the shareholders and employees’ representatives in an appropriate ratio, which must be stipulated in the articles of association. The employees’ representatives who are to serve as members of the board of supervisors must be democratically elected by the employees of the company through the meeting of the employees’ representatives, an employees’ meeting, or by any other means. The board of supervisors must have one chairman, who will be elected by at least half the total number of supervisors. To ensure independence and impartiality, neither the directors nor the senior managers may concurrently be appointed as supervisors.
Function. The function of the board of supervisors is to supervise the conduct of the directors, the general manager, and other senior managers of the company.
A legal representative is one of the principal players in an LLC, who represents and acts on behalf of the LLC. Most importantly, he is always deemed to have the full authority of the LLC and his actions bind the LLC. The legal representative has his own personal seal. Normally, the company seal will also be kept by him (or someone authorized by him). Most (if not all) of the corporate and legal documents will require affixing the company’s seal as well as the legal representative’s physical signature and/or seal. Most financial instruments will require the legal representative to affix his seal.
Furthermore, the legal representative executes the application documents for the incorporation of the LLC or alteration of its registration with the authorities. For this purpose, a specimen of his signature will have to be submitted to the company registration authorities. In this sense, the legal representative plays a very important role in the LLC’s operations.
The company’s legal representative may even incur personal liability for the illegal operation of the LLC. He is the only representative of the LLC recognized by the authorities and his signature is required for all official documents submitted to the authorities. The legal representative may act as an executive director, general manager, or the chairman of the board of directors. Normally, the powers of a legal representative are specifically defined in the articles of association of the LLC.
Joint Stock Limited Company
A joint stock limited company may be established either by way of promotion or by way of stock floatation.
A joint stock limited company shall have no less than two and no more than 200 promoters, of whom a majority shall be domiciled within the territory of China.
A joint stock limited company shall establish the board of directors, members of which shall range from five to 19. The board of directors may include employee representatives. Employee representatives who serve as board directors shall be democratically elected through the employee representatives' assembly, the employees' assembly or otherwise.
A joint stock limited company shall have the board of supervisors comprised of no less than three members. The board of supervisors shall include shareholders' representatives and an appropriate proportion of employee representatives. The proportion of employee representatives shall be specified in the articles of association but in any event shall account for no less than one third of the supervisors appointed. Employee representatives who serve as members of the board of supervisors shall be democratically elected through the employee representatives' assembly, the employees' assembly or otherwise.
Same as LLC.
A Single shareholder limited liability company
Single shareholder limited liability company refers to a limited liability company with one natural or legal person as a shareholder.
The requirements for a Single shareholder limited liability company are the same as that for LLC.
Any natural person may establish a single shareholder limited liability company. Such single shareholder limited liability company shall not establish a new single shareholder limited liability company.
A single shareholder limited liability company shall have no board of shareholders.
Same as LLC.
The partnership enterprise herein means a general partnership enterprise or a limited partnership enterprise established by natural persons, legal persons and other organizations within China pursuant to this Law.
A general partnership enterprise consists of general partners, who are jointly and severally liable for the debts of the partnership enterprise.
A limited partnership enterprise consists of both general partners and limited partners, whereby the former is, jointly and severally liable for the debts of the partnership enterprise and the latter are liable for the debts of the partnership enterprise only to the extent of their respective capital contribution.
Wholly state-owned enterprises, state-owned enterprises, listed companies, or public service units or social communities shall not become general partners.
Enterprise Income Tax
The rate of enterprise income tax shall be 25%.
Non-resident enterprises that have not set up institutions or establishments in China or have set up institutions or establishments, but the income obtained by the said enterprises has no actual connection with the set-up institutions or establishments, shall pay enterprise income tax in relation to their income originating from China. The tax rate is 20%.
For a partnership enterprise, every partner shall be a taxpayer. Where a partner of a partnership enterprise is a natural person, individual income tax shall be paid; where a partner is a legal person or any other organization, enterprise income tax shall be paid.
For more information, please contact Caroline Berube, HJM Asia Law & Co LLC, Guangzhou, China