Do You Know the Structure of A Limited Liability Company in China?
Saway Wang
Reliable, experienced, bilingual and expat orientated senior lawyer in China, specialized in litigation, arbitration, corporate & commercial, foreign direct investment, labor law..
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.
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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.
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The Right of Legal Representative:
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.
The legal representative is central to the company's management, making key decisions and overseeing operations.
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.
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.
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).
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The Liability of Legal Representative
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.
If the company commits an administrative offense, the legal representative may face penalties such as fines, detention, or activity restrictions.
If the company commits a criminal offense, the legal representative could be subject to criminal penalties, including fines, detention, or imprisonment.
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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).
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Shareholder’s Liabilities
Under China’s new Company Law, shareholders must fully contribute the registered capital of a limited liability company within five years of its establishment.
Generally, shareholders are only liable for the debts of the company to the extent of their subscribed capital contribution,
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Shareholders may be held jointly and severally liable in the following two situations:
(1)???? If a shareholder abuses the company's independent legal status and shareholder’s limited liability to evade debts, causing significant harm to creditors.
(2)???? In a single-shareholder company, if the shareholder cannot prove the company’s assets are separate from their own personal property.
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Shareholders’ Rights
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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.
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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.
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The Right of Supervisor
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.
Supervisors have the right to correct the behavior of directors or senior management when it is detrimental to the company's interests.
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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.
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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.
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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.
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