In western business, signatures are used as a way for individuals and companies to provide proof of identity and intent. By signing a document, the signee demonstrates knowledge, approval, acceptance, or obligation of its terms and conditions. Signatures can be affixed in a number of ways, but written and electronic signatures are by far the most frequently used.
In China, however, handwritten and electronic signatures are far less common. Instead, companies use “chops” or seals (印章) to legally authorize documents. Once the seal is affixed to a document, the company is legally bound and effective. Traditional signatures can be used as well but are not necessarily required under Chinese law. Seals represent an unlimited power of attorney vested in the holder, which is why it is essential that companies formulate a corporate seal policy to establish proper use and safeguards.
Types of corporate seals
In China, only the common, finance, and customs chops are legally required, however, some government departments may require other seals that are used for specific purposes.
Common seal or company seal (Gong Zhang)
The common or company seal is mandatory and is used any time a company signs a contract or publishes/issues a document, such as an internal rule, notice, or policy. The affixing of this seal onto a contract is prima facie evidence that the contract is duly signed and the company is bound by it.
Finance seal (Caiwu Zhang)
The finance seal is mandatory and is used when a company is dealing with financial matters, like depositing and withdrawing funds from its bank accounts, authenticating financial documents, etc.
Customs seal (Baoguan Zhuanyong Zhang)
A customs seal is used for customs declarations on import and export goods. It is mandatory for companies engaged in cross-border trade.
Contract seal (Hetong Zhang)
The contract seal has the same effect as a common seal but is generally used for signing contracts like agreements between salespeople and clients. This seal is not mandatory and it grants less authority than a company seal, making it useful for delegating authority.
Invoice seal (Fapiao)
In China, invoices without a seal are not valid, making this seal mandatory for issuing official invoices and tax receipts. This seal is also required to declare a purchase as a business expense. However, the function of this seal can be replaced by a Financial Chop, so it is not necessary to have both.
Electronic seal (Dianzi Gongzhang)
An electronic seal is the digital equivalent of a given seal, but it is solely used for online transactions. These seals are similar to the electronic signatures that are common in the West and are encrypted to ensure the user’s authority.
Seal of the legal representative (Fading Daibiaoren Zhang)
The seal of the legal representative is a personal chop that is held by the company’s legal representative often replacing or supplementing their actual signature. While not mandatory, this seal gives them the authority to execute legal documents and enter into binding obligations on behalf of the company. It can be used on their behalf even if they are not physically present, but many company policies require the affixation of both the corporate seal and the seal of the legal representative to mitigate risk.
Why corporate seals are important for SMEs doing business in China
If you are not familiar with the business landscape in China, corporate seals may seem like just a formality, but they are much more than that. Corporate seals play a powerful role in China’s business world, making them an important consideration for SMEs looking to do business in China. Here’s why:
They’re mandatory. Corporate seals are required for every business registered in China.
They provide control. Documents without a signature but bearing the official seal are legally binding for the company, so the holder of the company seal essentially controls the company.
They enable delegation. There are multiple seals that each serve different purposes, allowing companies to delegate tasks and responsibilities without giving too much authority.
They are part of Chinese business culture. Historically, seals have been an essential part of business in China. Being informed about the types of seals and their applications can help you become more familiar with Chinese business culture.
They help with verification. Corporate seals are much harder to forge than traditional signatures. Working with your lawyer, seals affixed on documents can be a valuable part of the verification process when vetting a new client.
They increase protection In China, contractual documents require the handwritten signature of an authorized person or the seal of the company. While Chinese contract law states that a written contract is legally binding when it is signed, many still honour a seal more than a signature because sometimes there is uncertainty about whether an individual has the authority to sign on behalf of a company.
How to get a company seal
Corporate seals are made by designated seal-making companies, then submitted to the Public Security Bureau in China for approval. Upon approval, the company must submit the necessary documents in order to register an official seal. This generally includes:
- The business license
- Operator’s ID card
- Power of attorney and detailed instructions on the type and quantity of seals required (from the legal representative)
- The ID card of the person authorized to handle the process
It’s important to follow the proper process when creating and registering a seal, otherwise, it may not be legally binding and can sometimes subject relevant persons to criminal liabilities.
Corporate seal best practices
Since corporate seals hold so much power, it’s important that they are used responsibly and safeguarded when not in use. Here are some of the best practices for handling corporate seals in China:
- Seals should be kept in a safe, secure environment at all times to prevent them from being lost, mishandled, or stolen.
- Establish authorized personnel to limit the number of people that can access the seals.
- Designate the individuals responsible for each seal. For example, the Head of Accounting will be in charge of the finance seal.
- Implement an application procedure that requires specific details about each intended use.
- Track and record seal usage. Employees should log and sign a form stating when, why, and who used the seal.
- Seals should not be used outside of the office or outside of regular office hours unless specified in the application procedure
- Seals should never be kept on the person of the authorized personnel.
- Loss, theft, or damage must be reported immediately.
- Consider hiring a third-party custodian of the seals. This neutral party can limit opportunities for misuse altogether.
- Create safeguards that limit the use of a seal. Example: Preventing business development managers from stamping contracts above a certain value without a signature from another authorized person.
- Keep and file copies of all documents that have the seal affixed.
- Clarify who is authorized to use the Legal Representative’s seal in their absence
- Establish clear consequences for misuse of a seal
- Anyone who has possession of a seal should be contractually mandated to return it immediately if they leave the company.
What if a seal is lost, damaged, or stolen?
In the event of a lost, damaged, or stolen seal, companies should:
- Report the situation to the Public Security Bureau, explaining how the seal was lost or stolen.
- Immediately make a declaration that a seal is lost in an official journal recognized by the local authorities. It is important to state that any contract or document that is signed by affixing that seal would not be binding upon the company going forward.
- After a certain amount of time, the legal representative may bring an original copy of the company’s business license to SAIC (State Administration for Industry and Commerce) or its branch office and apply for a new corporate seal.
Issues with corporate seals
While the seal system has its benefits, there are a few issues that can make things complicated. Whether you plan on registering a new business in China or just want to better understand the risks of company seals, consider the following:
Seals give the holder the authority to make critical and often irreversible decisions that could lead to long-term consequences if they are misused. Without proper safeguards in place, the holder of the seals could enter a company into contracts, make large transactions, change its stock structure, or even shift ownership to another party, all without further authorization.
Unlike traditional signatures, there are often many safeguards regarding the use of corporate seals. Application procedures plus the logging, signing, and authorization of forms can all take time, especially if the authorized personnel is unavailable. In the event that seals are lost or stolen, the company could temporarily lose the ability to pay wages, sign contracts, withdraw funds, and more. These delays can potentially impede a company’s operations and cause serious complications.
If you want to register a company in China, you need to use a seal to sign the registration documents, but you need to have a registered Chinese company to get a company seal. Because of this, many companies obtain a seal by connecting with a Chinese lawyer who has a good relationship with a seal maker, allowing them to get you a seal before your registration is complete.
In the event of a dispute with an employee, the employee may try to put pressure on the employer by taking control of one or more seals. In this situation, the disgruntled employee would have power of attorney, essentially granting them control of the company. This puts the employee in a position to negotiate their termination, increase severance pay and more, as the company’s operations could be constantly interrupted if the seal is not returned quickly.
If the disgruntled employee happened to be the legal representative, the company could find itself in a tough situation. If the legal representative refuses to return the seal, the company could be held liable for all the agreements entered into by the former legal representative. The company could fire the legal representative, but they would need the seal to do so. They could try to register for a new seal, but the registration documents would need the seal from the current legal representative.
If you find yourself in one of the situations mentioned above, you might consider contacting a lawyer for dispute resolution services. In any case, corporate seals are one of the many legal topics new and aspiring business owners will encounter when doing business in China. If you’re interested in learning more about business in China, you can explore other insights or sign up for a free account to connect with top-rated legal experts.