If you have dealt with any administrative tasks in China before, you will likely have noticed that most documents are stamped with a bright red circle. That’s a company seal, 公章 in Chinese, but also referred to as “chop” or “stamp”. It is no secret that doing business in China is far different from doing business in the West. But of all the things foreign companies should be aware of when entering the Chinese market, understanding the role and importance of the company seal is arguably the most crucial one.
Take a look at some of our previous articles: Chinese Fapiao – What Is It and Why Does It Matter?
In this article, we explain the role of company chops, how to apply for one, and share some best corporate governance practices to protect your business from risk.
China Company Seal – The Essentials
In short, a company seal has the same legal value in China as the signature in Western countries. Seals have been used for centuries and were notably used by emperors to render official decisions. This tradition has persisted in the modern business world, and seals are still commonly used not only in China but in other Northeast Asian countries.
While signatures are also used in Chinese contracts, the company seal carries the ultimate authority. In fact, once the seal is affixed to a document, it automatically becomes binding upon that company. The company seal represents the company as a whole, granting considerable power to whoever holds it – a lesson that many foreign companies have learned the hard way.
Adding to the inherent complexity of the seal system is the fact that China-based businesses generally have multiple seals, not just one.
Types of Seals
First, let’s take a look at the most common types of seals and their characteristics.
The company seal is the most important tool for any business in China. This round-shaped seal is used for the day-to-day operations of the business. In fact, obtaining a company seal is a mandatory step of the WFOE setup process. It may be used when signing contracts, official letters issued by the company, documents required by authorities but also internal company files such as monthly financial statements.
Legal Representative Seal
As the name suggests, this chop belongs to the company’s legal representative, as specified on the Business License. Unlike the company seal, the legal representative seal has a square shape and will be carved out with the initials of the legal representative. It is mostly used to approve financial transactions but can also sometimes be required for contracts.
Generally owned by the company’s Finance Director, the financial chop is used for all bank transactions, including check issuance and fund transfers.
The fapiao seal is required to issue official invoices. A fapiao without this stamp is not valid and therefore cannot be used as part of a business expense claim.
Far less common than the seals above, the department seal can be a very useful tool for larger corporations. A seal can be carved for each department of the company and be used to manage internal procedures while also acting as a powerful risk management tool. It, however, does not have any legal value outside the company and should not be used in transactions involving an external third-party.
There is a myriad of other chops that you may want to apply for or that may be mandatory depending on your business scope and activities (i.e. customs chop, translation chop, contract chop, etc.)
Electronic seal is a digital replication of a company’s seal, that bares the same legal status and validity as a physical chop and can be used for online transactions. Digital chop contains digital information of the signatory therefore the data is exclusively owned and controlled by the signatory at the time of signing.
How to Apply for a Company Seal
China’s State Council clarified the application process for a company chop in the announcement (Guo Fa (2017) No. 7).
In order to obtain a company seal, the enterprise must provide the below materials to the engraving unit:
1. Business license (original and copy)
2. Photocopy of the Legal Representative’s identity document
3. Operator’s ID card (original and copy)
4. Power of attorney (signed by the Legal Representative) with detailed instructions on the type and quantity of seals required
If the name of the legal entity changes or if the seal gets damaged, the company should apply for re-engraving. In addition to the documents above, the company will need to present the old official seal to local authorities. It will then be destroyed on the spot by the engraving unit.
If the official seal is lost or stolen, the company should notify the local police as soon as possible. The enterprise should also publish an announcement about the loss in a designated newspaper and wait at least one day before making a new seal application.
The powerful nature of the company seal means that businesses should implement clear internal guidelines on seal use and management. We regularly work with foreign clients on solving chop issues. If you want to prevent abuse, limit misuse, and avoid nightmare situations where your company chop ends up being hostage of an angry employee, here are some best practices to keep in mind.
- Keep your stamps in a safe, secure environment at all times to prevent them from being stolen.
- Set up rules that prohibit a Business Development Manager to stamp contracts above a certain value and have clear provisions of this in his or her labor contract. In the case of misbehavior, the employee would be liable for any financial losses.
- Clarify who is authorized to use the Legal Representative’s seal in his or her absence and consequences for misusing the chop.
- Track and record chop usage – ask employees to fill in and sign a form stating when, why, and who used the seal.
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