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
Do You Know the Structure of A Limited Liability Company in China?
As of July 1, 2024, the revised Company Law of the People’s Republic of China (PRC) has come into effect, bringing significant changes for foreign-invested enterprises, particularly concerning the organization of limited liability companies. This article examines the updated structural requirements for limited liability companies in China and provides an overview of the primary duties associated with each role. It aims to help foreign-invested enterprises establish a compliant and efficient company structure while ensuring adherence to the PRC’s legal framework.
1. Legal Representative
In China, every company is required to appoint a legal representative, typically the chairman, executive director, or general manager, as specified in the company’s articles of association. The legal representative’s actions are legally binding on the company, and their name is listed on the business license.
（1）The Right of Legal Representative
- External Representation:
The legal representative acts on behalf of the company in external matters. Their actions bind the company, and the company is responsible for the legal consequences.
- Internal Management
The legal representative is central to the company’s management, making key decisions and overseeing operations.
- Signing Contracts or Legal Documents
The legal representative can sign contracts and legal documents on behalf of the company. In some cases, their signature alone, without the company seal, may be sufficient to bind the company.
- Authority Beyond Limits
If the legal representative exceeds their authority when signing a contract, the contract is still valid for the company, unless the other party knew or should have known of the overstep.
- Litigation
The legal representative can initiate legal proceedings on behalf of the company, even if the company seal is unavailable (e.g., lost or controlled by another person).
（2）The Liability of Legal Representative
- Civil Liability – Consumption Restrictions
If the company fails to fulfill a court judgment and enforcement actions are taken, the legal representative may face restrictions on high consumption, limiting their personal spending.
- Administrative Liabilities
If the company commits an administrative offense, the legal representative may face penalties such as fines, detention, or activity restrictions.
- Criminal Liabilities
If the company commits a criminal offense, the legal representative could be subject to criminal penalties, including fines, detention, or imprisonment.
2. Shareholders and Shareholders’ Meetings
Shareholders are essential to a company’s foundation, contributing capital and holding liability up to the subscribed capital contribution. They enjoy rights such as income from company dividends, involvement in major decisions, and authority over key management appointments. The shareholder can be an individual, company or partnership.
The shareholders’ meeting is the highest authority in a limited liability company (LLC) in China, comprising all shareholders (except in single-shareholder companies).
（1）Shareholder’s Liabilities
- Capital contribution within five years
Under China’s new Company Law, shareholders must fully contribute the registered capital of a limited liability company within five years of its establishment.
- Limited liability
Generally, shareholders are only liable for the debts of the company to the extent of their subscribed capital contribution,
- Jointly and severally liability
Shareholders may be held jointly and severally liable in the following two situations:
(i) If a shareholder abuses the company’s independent legal status and shareholder’s limited liability to evade debts, causing significant harm to creditors.
(ii) In a single-shareholder company, if the shareholder cannot prove the company’s assets are separate from their own personal property.
（2）Shareholders’ Rights
- Entitled to the dividends
- Monitor and inspect the company’s finance
- Determine critical business and investment plans
- Appoint directors and supervisors, as well as determining their remuneration;
- Adjust the company’s registered capital through increases or reductions;
- Amend the articles of association;
- Review and endorsing board and supervisory reports, annual financial budgets, accounting strategies, profit distribution, and loss recovery plans; and
- Approve mergers, divisions, dissolutions, liquidations, or changes in the company’s legal structure;
- Authorize the issuance of corporate bonds;
- Other rights as specified in articles of association.
3. Directors and Board of Directors
The board of directors is a key governing body for a company, generally consists of at least three directors, including the chairman, vice-chairman and other board members. In some small-size companies, there may be no board of directors, but only one director, often the executive director.
Directors are elected by the shareholders, serve up to three years, with re-election possible upon term expiration. The directors or board of directors are responsible for managing daily operations and aligning with shareholder interests, mainly including calling shareholder’s meeting, setting operational and investment strategies, formulating various company plans and rules, managing budgets, appointing senior executives and financial officer, executing the resolutions of shareholders’ meeting.
4. Supervisors and Supervisory Board
Supervisors in a company are appointed to ensure the company complies with its regulations and laws. To avoid conflicts of interest, supervisors cannot hold any other executive roles within the company and must remain independent of the management. Supervisory Board shall consist of more than three supervisors, which shall include representatives of shareholders and employees.
The revised Company Law offers more flexibility for limited liability companies regarding the supervisory board system. For a limited liability company that is small size or has a small number of shareholders, it can appoint a single supervisor or, with unanimous consent, forgo the supervisor position.
The Right of Supervisor includes:
- Inspect company finance
- Monitor actions of directors and senior management
to ensure that their behavior aligns with the company’s best interests, and recommend their removal for misconduct
- Investigation Right
The supervisory board may investigate the company when finding the company under abnormal operations, if necessary, it may also engage an accounting firm to have the investigation at the company’s cost.
- Rectify any misconduct
Supervisors have the right to correct the behavior of directors or senior management when it is detrimental to the company’s interests.
- Initiate lawsuits
against any acts detrimental to the interest of the company.
- Right to address question and make suggestions
- Propose for an extraordinary shareholders’ meeting
- Other rights as specified in articles of association.
5. Senior Management
Senior management typically includes the manager, deputy manager, and financial officer. While these positions are not mandatory under Chinese company law, companies have the flexibility to establish them based on their specific needs and organizational structure.
The senior management team is responsible for daily operations of the company, implementing the strategic decisions made by the board of directors, and achieving the goals set by the board.
（1）Manager/Deputy Manager
The manager, as a key executive, leads senior management and may also serve as a director, legal representative, or employee. In limited liability companies, the board of directors appoints or dismisses the manager; in smaller companies, this duty may fall to the director.
Reporting to the board, the manager oversees operations, implements plans, drafts management systems, proposes key hires or dismissals, and exercises any additional board-authorized powers.
（2）Financial Officer
In Chinese companies, the financial officer is a required position, distinct from the Legal Representative or Executive Director. Typically filled by an internal finance manager or third-party provider, this role manages tax compliance, financial reporting, and regulatory adherence, often with support from accounting firms.
Conclusion
The structure of a limited liability company can be summarized as follows: the shareholders’ meeting holds the highest authority, responsible for electing or replacing directors and supervisors, reviewing reports from the board of directors and supervisory board, and making critical company decisions. The board of directors is tasked with executing shareholders’ resolutions and developing strategies for major initiatives, while the supervisory board is responsible for overseeing financial activities and ensuring that directors and senior management fulfill their duties responsibly. For foreign-invested enterprises, selecting the appropriate corporate structure is essential to effectively mitigate potential risks and support long-term growth.
If you have more questions about company structure, please feel free to contact us.
Saway Wang
Email: sawaywang@billionslawyer.com
Tel/Whatsapp: +86 18017682422
