The Red Seal that Cuts the Deal

Last updated: Oct 2020
Regulations Guide to WFOE Establishment, Registration & Liquidation

If you are starting a business in China, you need to know what a chop is. The following article discusses this important seal, and analyzes the different types of chops that companies use throughout their daily operations.

PTL Group specializes in company registration in China. We make sure that China company registration is done right, because doing so will help us focus on the real goal: long-term WFOE management. To help our clients, we provide extensive operational support for registered entities. This is where our knowledge and expertise really make a difference.

We hope you find the following information useful.

The Red Seal that Cuts the Deal

The round red stamp that noticeably appears on any formal document in China has critical implications. These red stamps, commonly referred to as Chops, constitute the company’s legally binding decision de-facto. They are wrongly compared to the CEO signature as customary in Western companies. Why is it wrong to compare the two? Because in China, Chops carry greater importance. The Chinese chops represent the company towards third parties and are valid even without an official signatory.

Business owners in China can ease their concerns: chops are difficult and even impossible to forge. If a company loses its chop, it can only produce a new one with the approval of the Public Security Bureau (PSB), and chops forgery is heavily sanctioned. That said, the chops system entails risks, so full control over their usage must be maintained at all times.

Types of chops

There are several types of chops, some are mandatory and some optional. Their purpose, application and the individual in charge of them vary, based on the business size.

In order to prevent misuse of the chops and to delegate authority, its recommended to diversify their use.

The company’s official chop

After the registration phase, WFOEs are obligated to produce an official chop at the PSB. The chop is usually round and contains the company’s full name in Chinese.

The company chop is the most important chop and has the widest scope of use. For instance, it is required for contractual documents, documents signed with the government, applications related to the company’s bank account, certifications on behalf of the company, etc.

The chop is deposited to the company’s legal representative. Once a document is sealed, it is validated and the company becomes liable for all consequences.

Financial chop

This too is a mandatory chop (although it can sometimes be replaced by the company chop) and is recorded with both the PSB and the company’s bank.

The financial chop is used for financial affairs such as money transfers, issuing checks, tax filing, cash withdrawals, opening or changing the company’s bank account details.

It is usually kept by the individual who is in charge of daily transfers, separately from the company chop.

Legal representative chop

The company’s legal representative owns a personal chop. This employee possesses the legal authority to execute the powers and duties of the company, and is accountable for them.

This chop is also mandatory, and has to be recorded at the PSB and the company’s bank. Alongside the company chop, it is mostly used for signing official documents and financial activities.

Custom chop

This chop is required for companies that engage in cross-border trade. It is used for customs declarations and import-export processes.

It is recommended to store the custom chop with the employee who is responsible for the company’s import-export affairs.

Contract chop

This is an optional chop used for signing contracts between the company and third parties (employees, clients, etc.).

Since this chop grants relatively less authority, it is recommended to keep it separately from the Company chop, and to permit only the employee who keeps it to use it.

Invoice chop

This chop is mandatory for declaring business expenses and issuing official invoices and tax receipts.

Electronic chop

This is the digital version of the physical chop, and is used for online transactions (financial and contractual).

In order to enjoy the same legal status as the physical chops and to carry real legal authority, the electronic chop must meet several conditions.

Careful management – watch your back

For WFOEs in China, the most significant risks arise when relying primarily on local sales teams. When these teams keep the chops, they are awarded absolute power, which might pose a concern to foreign managers.

Here are some tips to increase control and prevent the misuse of chops:

  • Since the chops are the company’s most valuable asset (whoever keeps them can theoretically sell the company), they should be kept in a safe place. Access should be limited to the minimum.
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  • The most often used chops can be kept by the individuals who use them regularly.
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  • It is recommended to record which employees hold which chops.
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  • It can be determined that the use of chops in excess of a certain quota (for example in procurement contracts) requires the approval of the CEO.
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  • New managers are advised to verify where each chop is kept.

A practical and accepted solution is to find a reliable party who will help manage the company, and will appoint an actively involved trustee who will safeguard the company’s chops.

PTL Group provides such a solution to dozens of foreign companies in China. Among other things, we help fill the CFO position, manage all bureaucratic and financial transfers, and provide company owners with valuable peace of mind.

Regulations in China change relatively frequently. For the most up-to-date regulations, please check in with us.