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The use of company seals in China is deeply embedded in daily business practice and replace the function of signatures as used in Western countries. Every company – domestic or foreign-invested – holds a set of company seals, of which each is to be used for a different purpose.
Due to the power company seals represent a need for clear internal controls and supervision for use is a prerequisite. In this article the importance of sealed documentation in China will be discussed, followed by the outlining the characteristics and use of most commonly used seals. Finally focus goes out to establishment of a legal framework and internal control system for seal company seal management.
1 The Importance of Sealed Documentation
In China it is custom to have all corporate and commercial documentation sealed. Government regulation requires state owned enterprises to seal all contacts and this practice is followed by all legitimate private companies.
Regarding the conclusion of contracts and the use of the company seals, the PRC Contract Law includes the following provisions:
The purpose of a written contract is to provide the engaging contract parties with an effective measure when terms of the contract have been breached. In the event a dispute results in litigation, Chinese courts will determine the authenticity of the contract. When a contract is sealed with the official, registered company seal, the contract will be considered valid.
2 Risks Associated With Company Seals
Risks associated with seals that arise from sources outside the company usually relate to fraud and forgery. Due to the significance placed on the use of company seals in China in daily business practice, it is not uncommon for seals to be forged.
The risk of using company seals in correspondence with other companies is that the counterparty is under the impression that the correspondence is legitimate. For example, an enterprise may have received a signed and sealed offer from a mainland China company stating that goods will be delivered upon payment. Yet, the mainland China company whose name has been included in the offer in fact never has authorized such an offer as the seal was a forgery.
3 Commonly Used Seals
Within mainland China the following seals are commonly used in organizations:
3.1 Company seal
The company seal is used to legally authorize documentation and serves as the company’s official signature. The company seal is usually held by the legal representative. Enterprises are required to have the seal carved as part of their incorporation process, after approval by the local bureau of the Administration of Market Regulation in the locality where the enterprise will be established is given. In accordance with the regulations stipulated by the State Council, the company seal is round shaped and has a Penta star (five-pointed star) in the middle, which is surrounded by the name of the company written in Chinese characters. The bottom of the seal often includes the company registration number. The maximum diameter of the company seal is set at 4,5 centimeters. The name of the company must be approved by the Public Security Bureau (PSB).
3.2 Legal representative seal
The legal representative of a company is a natural person who is appointed and acts on behalf of the company in exercising its functions and powers according to the law and the company’s articles of association. The legal representative seal is a personal seal held by the legal representative of the company. The seal can replace the signature of the legal representative. It is not a mandatory seal. However, for foreign invested enterprises such as Wholly Foreign Owned Enterprises and (Equity) Joint Ventures where the legal representative resides overseas and thus cannot easily and on short notice personally sign documentation, the delegated use of the seal is common practice. The legal representative seal is a square shaped and has a diameter of approximately 2 centimeters. It contains the full name of the legal representative.
3.3 Finance seal
The finance seal is a mandatory seal to any domestic or foreign invested company in China and its use cannot be replaced by any other company seal. The finance seal is a square shaped seal with a diameter of approximately 2,5 centimeters and contains the full company name with the extension “finance seal” in Chinese characters in its description. The imprint of the seal is to be read in the top to bottom direction instead of standard left to right. The finance seal is usually held by the company representative in charge of the financial administration and where possible kept separately from the company seal to avoid the risk of misuse.
3.4 Contract seal
The contract seal is specifically used for officially validating contracts, i.e., for concluding of commercial contracts, purchase orders, terms and conditions and labor contracts. The contract seal is not a mandatory seal of a company and can be replaced by the company seal. The contract seal is a round or oval shaped seal, which includes the company name on the top and the business registration number in the bottom. In the middle it must state the full company name with the extension “contract seal”.
3.5 Invoice seal
The invoice seal is not a mandatory seal and can be replaced by the use of the Finance seal. Companies cannot issue any domestic invoices without affixing an imprint of the invoice seal on the official VAT fapiao. The invoice seal is oval shaped and has the name of the company in Chinese character written along the outer edge in of seal. The business registration number is listed in the middle of the seal, and in the bottom it states “fapiao” in Chinese characters.
3.6 Customs seal
It is mandatory for companies involved in cross-border trade to have a customs seal, which is used for customs declarations on import and export of goods.
3.7 Other seals
In addition to the seals discussed above, a company can utilize other non-mandatory seals for different purposes, such as the implementation of the use of company seals on a department level. Examples are a Procurement Department seal and Human Resources Department seal. The company must specify the power these seals hold.
Company seals are usually accompanied by the signature of the authorized signatory, herewith adding an additional layer of control to ensure the seals are duly used.
4 Seal Management
Companies are advised to establish a legal framework and internal control system to determine which company representative is responsible to hold which company seal, to determine the level of authorization on its use, and recording of usage. The regulations and held powers can be specified and recorded in the company’s Articles of Association and in the Power of Attorney of the respective responsible employees.
As prior briefly discussed, the use of a personal seal like the legal representative seal can be delegated to an employee of the China-based company as well, with the delegated powers recorded into the Articles of Association and Power of Attorney. Alternatively, the use of the seal can be delegated to third party, such as an accounting or law firm, which will only utilize the use of the seal in accordance with predefined procedures.