Do You Really Know about Legal Representative?
1. What is a Legal Representative?
A legal representative（法定代表人）is the externally authorized representative of a company and the person responsible for executing corporate affairs on behalf of the company. They not only exercise civil rights on behalf of the company externally but are also responsible for internal daily management and major decision-making.
2. Who Can Serve as a Legal Representative?
The legal representative shall be a director or manager of the company. If the appointed director or manager resigns, they are deemed to have simultaneously resigned from the position of legal representative. The company must appoint a new legal representative within 30 days after the resignation.
3. What Does a Legal Representative Do?
(1) Representing the Company in Corporate Affairs
The legal representative may conduct business activities and handle legal matters in the company’s name, and the legal consequences of such actions are borne by the company.
The representative authority of the legal representative derives from statutory law and does not require authorization via a power of attorney from the company. Their representative authority is comprehensive rather than limited to specific matters. Their representative actions are not restricted to civil legal acts.
For example, unauthorized borrowing activities conducted by the legal representative are still legally binding on the company, requiring the company to assume liability for the borrowing. However, after the company fulfills its liability, it may seek recourse against the legal representative if they acted with fault.
(2) Signing Authority
The legal representative has the right to sign critical corporate documents, including contracts, agreements, powers of attorney, capital contribution certificates, corporate bonds, and other legal instruments. Additionally, when applying for changes to corporate registration, the legal representative must sign the application for registration changes, resolutions, or decisions.
(3) Participation in Litigation
The legal representative has the right to represent the company in litigation and arbitration proceedings, appear in court or mediation, sign and submit legal documents, and cooperate with enforcement actions. Even if the company’s official seal is lost or improperly controlled by others, the legal representative, as the fundamental embodiment of the company’s will, may initiate litigation on behalf of the company without the seal.
(4) Management Authority
– Implementing Decisions: Executing business plans in accordance with the company’s articles of association or resolutions from governing bodies (e.g., shareholders’ meetings, board of directors).
– Daily Operations: Deciding routine operational matters (e.g., personnel appointments, fund usage) within authorized limits.
(5) Statutory Duties for Specific Matters
– Compliance Obligations: Ensuring the company’s operations comply with laws and regulations (e.g., environmental protection, workplace safety, taxation).
– Reporting Obligations: Reporting major incidents (e.g., safety accidents, bankruptcy) to relevant authorities.
4. What Restrictions Apply to a Legal Representative?
(1) Restrictions Under Articles of Association or Internal Rules
The company’s articles of association or resolutions from shareholders’ meetings/board of directors may impose restrictions on the legal representative’s authority (e.g., requiring board approval for contracts exceeding a specified amount).
(2) Prohibition on Ultra Vires Representation
If a legal representative acts beyond their authority and the counterparty is not acting in good faith (i.e., aware of the overreach), the company may invalidate the act. However, if the counterparty is a bona fide third party (unaware and with no reasonable duty to know of the overreach), the act remains valid.
For example, if a legal representative exceeds their authority to borrow funds, and the third party is bona fide, the borrowing is valid, and the third party may demand repayment from the company. If the third party knowingly collaborates with the overreach, the company may invalidate the borrowing.
5. What Liabilities and Risks Does a Legal Representative Face?
(1) Civil Liability for Causing Losses to the Company
A legal representative who intentionally or through gross negligence causes losses to the company must compensate the company.
(2) Civil Liability for Harm to Third Parties
If a legal representative causes harm to others while performing duties, the company assumes civil liability. After compensating the injured party, the company may seek recourse against the legal representative if they were at fault, per law or the articles of association.
(3) Civil Liability When the Company Becomes a Judgment Debtor
If the company becomes a judgment debtor, its legal representative will face restrictions on high-consumption activities (e.g., travel, luxury purchases) and may be subject to exit bans or judicial detention as enforcement measures.
(4) Administrative and Criminal Liability
If the company engages in serious illegal acts (e.g., tax evasion, environmental pollution, illegal business operations), the legal representative may face administrative penalties or criminal prosecution.
Conclusion
The legal representative is the external face of a limited liability company, playing a critical role in corporate operations. While Chinese law grants the legal representative broad powers to ensure smooth execution of corporate affairs and protection of company interests, they must strictly comply with legal and statutory obligations to prevent abuse of authority, illegal operations, or harm to the company. Ensuring the legal representative’s compliance, effectiveness, and accountability under necessary oversight is fundamental to the company’s long-term stability.
Saway Wang
Email: sawaywang@billionslawyer.com
Tel/Whatsapp: +86 18017682422
What Types of Enterprise Are There in China and Their Pros and Cons
When a foreign company aims to establish or expand in China, choosing the right business structure is crucial. Different structures cater to specific needs based on activities, industry, and investment size. Key factors like legal liability, compliance, setup time, and permitted activities help assess costs, risks, and growth potential. The right choice ensures a solid foundation for smooth operations and future growth in China’s market.
In China, we have the following types of enterprise:
1. Company
Limited liability company
Joint stock limited company
2. Partnership
General partnership
Limited partnership
3. Proprietorship
A sole proprietorship
This article will help you know the types of enterprise in China and their pros and cons.
1. Company
Depending on the scope of limited liability of shareholders to the company, the company can be divided into limited liability companies and joint-stock companies.
(1) Limited Liability Company
A Limited Liability Company (LLC), also known as a Limited Company, and the company is liable for the company’s debts with all its assets due to its separate legal identity. Its main feature is the limited liability of the shareholders, that is, the shareholders only need to be liable for to the extent of their subscribed capital contribution, without having to assume all the debts of the company.
It’s a popular choice for local and foreign investors. These companies can be privately (private company) or state-owned (state owned enterprise), offering flexible ownership options.
A China Limited Liability Company requires at least one shareholder, who may hold multiple roles within the organization.
- Advantages
A limited liability company is set up by more than one and less than fifty shareholders, and its organizational and management structure is relatively simple and its operating costs are low.
- Disadvantages
It is a closed company, unable to issue shares publicly, and the scope and scale of fund-raising is small, which usually makes it difficult to meet the needs of large-scale production and operation.
(2) Joint Stock Limited Company
A joint-stock company has its capital divided into equal shares, with shareholders liable only for their share contributions while the company assumes full responsibility for its debts.
This structure separates ownership from management, allowing for easy transfer of shares and facilitating capital expansion.
A joint-stock company can be established through initiation, where promoters subscribe to all shares at formation, or fundraising, where they subscribe to some shares and raise the rest from a targeted group or the public. To establish a joint-stock limited company in China, there must be 2 to 200 promoters, with over half residing in China.
- Advantages
Easy Transfer of Shares：Joint stock companies offer easy share trading for liquidity and reinvestment.
Growth and Expansion: By issuing shares and debentures, they raise substantial capital and secure loans for expansion
Transparency and Trust: This funding supports growth while mandatory financial disclosures enhance transparency and accountability, fostering stakeholder trust.
- Disadvantages
Complex Formation Process: Establishing a joint stock company is complex, requiring extensive documentation, approvals, and high costs for experts and registration.
Limited Confidentiality: it must disclose significant information to the registrar, making it publicly accessible. This requirement can limit a company’s ability to keep its operations confidential.
Complex Regulatory Compliance: Companies must comply with complex legal and regulatory requirements, with non-compliance leading to significant penalties. Filing annual reports and returns demands time and resources, raising costs.
Decision-Making Delays：Decision-making can be slow due to lengthy consultations and board discussions, and management costs are higher.
Despite these challenges, joint stock companies are ideal for large-scale, capital-intensive industries. Early-stage businesses may prefer a limited liability structure, with the option to convert to a joint stock company as they expand.
2. Partnership and Sole Proprietorships
Enterprises with unlimited liability of the contributors, which, depending on the form and number of contributors, are categorized as partnerships and sole proprietorship.
(1) Partnership
A partnership is a for-profit organization where partners share capital, operate jointly, and divide profits and risks. They bear unlimited joint liability for the business’s debts. Partnerships can be general or limited, depending on partners’ liability.
(i) General Partnership
In a general partnership, two or more partners share unlimited liability for the business’s debts.
A Special General Partnership, often used by professional service firms like accounting and law firms, involves some partners holding unlimited liability if debts arise due to intent or negligence, while others are only liable up to their investment. A General Partnership Entity (GPE) is a specific type where partners share both liability and management equally, making it ideal for small businesses where partners want shared control and responsibility.
(ii) Limited Partnership
A limited partnership consists of 2 to 50 partners, including both general and limited partners. General partners have unlimited liability for the partnership’s debts, while limited partners are only liable up to their capital contributions.
At least one general partner and one limited partner must always be present. If only general partners remain, the partnership must convert to a general partnership; if only limited partners are left, it must dissolve. Partners can include individuals, legal entities (enterprises), or organizations, but wholly state-owned companies, state-owned enterprises, listed companies, and public welfare institutions cannot serve as general partners.
Partnerships offer flexibility, simpler decision-making, and a lower tax burden, but general partners face high risks due to their unlimited liability for the business’s debts.
(2) Sole Proprietorship
A sole proprietorship is a business entity in which a natural person invests, the property is owned by the investor personally, and the investor bears unlimited liability for the debts of the enterprise with his personal property.
Its advantages and disadvantages are similar to those of a partnership, on the one hand, its establishment, operation and management procedures are relatively simple; on the other hand, the independently funded natural person is required to assume unlimited liability for the debts of the enterprise.
- Who Can Establish a Sole Proprietorship in China?
A sole proprietorship is the simplest business structure in China, run by a single individual who has full decision-making power. However, foreign nationals cannot directly establish a sole proprietorship; they must form a Wholly Foreign-Owned Enterprise (WFOE) or enter into a partnership.
Only Chinese citizens are permitted to create sole proprietorships. Foreign investors can access the Chinese market by forming a Joint Venture (JV) with a Chinese citizen or applying for a WFOE. Sole proprietors must obtain specific licenses and permits related to their business activities, but they cannot apply for an import and export license for international trade.
- Advantages
Tax Treatment: Neither partnerships or sole proprietorships pays enterprise income tax, they both enjoy simpler tax filing processes compared to corporations. However, partners and sole proprietors are responsible for personal income tax, with rates ranging from 5% to 35% based on profits.
- Disadvantages
Liability Issues: A major drawback is unlimited liability, exposing partners’ and sole proprietors’ personal assets in China come with notable business risks.
Struggle to attract investors: Investor interest is low due to the risk of unlimited liability, and transferring ownership requires unanimous partners’ consent. Limited partners also have little control over decisions.
Conclusion
For further information on Chinese company law, please contact us directly. Our team has extensive experience in corporate law and can provide a full range of legal services for your company in China.
Feel free to contact us if you need more information.
Saway Wang
Email: sawaywang@billionslawyer.com
Tel/Whatsapp: +86 18017682422
