The importance of a company chop and how to obtain one as well as the serious legal implications of misuse is potentially the single most important business practice that foreign investors must familiarize themselves with before entering the Chinese market. This article will discuss the following topics related to company chops in China:
- What a company chop is, its departmental varieties and how it is used in China.
- The process through which a foreign invested enterprise can obtain a company chop.
- The importance of creating a secure management system to prevent misuse of the company chop.
What is a Company Chop?
A company chop or seal is used in Chinese business, in-lieu of a signature, to finalize transactions and legal agreements. Even basic actions like opening a bank account and altering the corporate structure of a business require the use of a company chop. As such, conducting business in China without one is fundamentally impossible.
In addition to a master company chop that serves as the company’s official “signature” there are several department specific chops that serve to validate their respective functions. Some examples of important chops are:
- The finance chop
- The legal representative chop
- The contract chop
- The fapiao chop
The variety and overlapping roles of these chops with the company chop highlight the need for effective chop management within any company.
Obtaining a Company Chop
Every registered company in China is given permission to engrave a set of company chops after completing their registration with the Public Security Bureau PSB. However, there are several steps that must be completed before a foreign invested enterprise FIE can obtain a company chop. After pre-registering your name with the State Administration of industrialand Commerce SAIC and gaining approval from the Ministry of Foreign Commerce MOFCOM, a FIE should clearly define the Business Scope of the company in as much detail as possible.
Following this, prior to registration a FIE should prepare the following documents:
- The pre-registered name of the company
- The legal address of the FIE
- The articles of association
- A corporate organization chart
- Amount of Registered capital
Once these materials are prepared a FIE can be registered with the PSB and company chops can be obtained.
The benefits of proper management of a company’s chops are numerous. As mentioned when explaining the importance of a chop in the Chinese business world, the overlapping roles of the department chops with the company chop necessitate that chops are stored separately to prevent misuse, the finance chop with the finance director and the contract chop remaining with the legal department for example. Another strategy employed is requiring that the company chop be used in additional to the department chop, creating an additional layer of verification during any transaction or legal agreement.
With some exceptions for specific legal and financial documents, anyone bearing an authentic company chop is considered qualified to complete agreements on behalf of a company. This can create profound legal consequences for any company that misuses a chop intentionally or otherwise. There are numerous examples of foreign investors finding themselves in extremely difficult situations due to a disgruntled general manger refusing to relinquish possession of a company chop. In order to prevent this sort of situation it’s crucial that all FIEs ensure that their chops are stored safely and with a trusted associate. Additionally, many companies, domestic as well as foreign invested, employ the use of highly detailed logs in order to closely track who is using a chop at any given time.
Although brief, this overview of chops should give any foreign investor an idea of how the company chops are used in China, how to obtain one, and the importance of chop management for any company operating in China. When establishing a FIE in China investors should prioritize the creation of a clear and secure chop management plan that prevents abuse and allows investors to focus on the core business.