Choosing the right legal entity before launching: sole proprietors and general partners are fully liable, while limited liability companies offer “limited” liability

3. Choosing the right legal entity before launching: sole proprietors and general partners are fully liable, while limited liability companies offer “limited” liability

Cost: Registration can be completed online via local government portals in just a few hours. After establishing a limited liability company, monthly bookkeeping and tax filing become ongoing expenses — either you handle them yourself (which takes time) or you hire a professional accountant, with costs varying by region.

In plain terms: Sole proprietors and general partners bear unlimited personal liability — they must repay all debts incurred by their business. Shareholders of a limited liability company, however, are liable only up to the amount they agreed to contribute at incorporation. That said, they must actually pay in that full amount within five years; if the registered capital is set at 1 million, that is the maximum potential debt they could face. Mixing personal and corporate finances nullifies this “limited” protection.

Benefit: Debts incurred by a sole proprietorship must be repaid using the owner’s personal assets or those of their family. General partners in a partnership also bear unlimited joint and several liability — they must repay all partnership debts, with creditors allowed to demand full repayment from any single partner. Limited partners in a limited partnership are liable only up to their subscribed registered capital. The same rule applies to shareholders of a limited liability company. Nevertheless, this “limited” liability protection ceases to apply in three specific scenarios: first, the subscribed amount must be fully paid within five years of incorporation; otherwise creditors may demand early repayment if the company cannot meet its obligations. Second, any withdrawn capital must be returned. Third, using the company merely as a shield to evade debts invalidates this protection — this also applies to single‑shareholder firms where no clear separation exists between corporate and personal finances. In all such cases, shareholders or partners remain personally liable for all corporate debts (nationwide, effective July 2024).

Evidence grade: A

Sources: National People's Congress (2020). Civil Code (Article 56). <https://www.spp.gov.cn/spp/fl/202006/t20200602_463888.shtml>; National People's Congress Standing Committee (2006). Partnership Enterprise Law (revised in 2006, Article 2). <http://www.gov.cn/gongbao/content/2006/content_413955.htm>; Standing Committee of the National People's Congress (2023). Company Law (revised in 2023, Articles 4, 23, 47, 53, 54). <https://www.gov.cn/yaowen/liebiao/202312/content_6923395.htm>

Notes: The “limited” liability principle hinges on strict separation between corporate and personal finances: corporate accounts must not be used for personal expenses, and complete financial records must be maintained. Avoid inflating the registered capital merely for appearance’s sake; the subscribed amount must be paid in full within five years. Setting it at 1 million means you could potentially owe up to 1 million in debts.