Article 63 of the “Company Law of the People’s Republic of China” (hereinafter referred to as “The Company Law [2018 Revision]”) provides that “A shareholder of a one-person limited liability company who is unable to prove that the company’s property is independent of his own property shall bear joint and several liability for the company’s debt”. Due to the existence of such a provision, the probability of piercing the corporate veil is extremely high in judicial practice. To avoid the high “piercing rate” (risk of shareholders’ personal liability), investors prefer to register in the form of a multi-shareholder company.

Despite having the appearance of being a multi-shareholder company, it is a “de facto one-person company” made up of kinships who are shareholders, such as a spouse, paternity, maternity, etc. Therefore, when judging whether it should be regarded as a “one-person company”, the court prefers the standard “Substance Over Form Principle”. The court will consider the company’s establishment of the source of capital, the relationship among shareholders, and the company’s internal regulatory framework system to judge.

In addition, the Company Law (2018 Revision) does not explicitly provide for the issue of proving the “independence of property”, and in the judicial practice, the court highly relies on the internal financial management system of a one-person company to make judgments. Whether a one-person company prepares a financial and accounting report at the end of each accounting year and whether it conducts an audit and other matters in accordance with Article 63 of the Company Law (2018 Revision) are the substantial basis for the court to judge whether a shareholder and the company’s property are commingled.

Based on the Company Law (2018 Revision) and judicial cases, as well as the New Company Law (2023 Revision) which will come into force on July 1, 2024, this paper analyzes the criteria for courts to judge one-person company, the conditions for the application of piercing the corporate veil of one-person company, how shareholders of one-person company prove that their assets is independent of the company’s assets, and how new and old shareholders assume liability after the equity change of one-person company.

I. Introduction Article 2 of the Company Law (2018 Revision) [1] provides that “For the purpose of this Law, a ‘company’ refers to a limited liability company or a joint stock limited company established within the territory of the People’s Republic of China according to this Law”. Under the Provisions, the companies are divided into two categories: “Limited Liability Company” and “Joint Stock Limited Company”. The shareholders of a limited liability company are liable to the company within the extent of the amount of capital contributions they have paid; while the shareholders of a joint stock limited company are liable to the company within the extent of shares they have subscribed for. The common characteristic for both types of companies is to require shareholders to bear limited liability. A limited liability company shall be made up of not less than 1 but not more than 50 shareholders. To establish a joint stock limited company, there shall be not less than 2 but not more than 200 promoters, of whom more than half shall have their domiciles within the territory of the People’s Republic of China [2]. From the perspective of the headcounts of shareholders, a limited liability company is a closed company, while a joint stock company is a public company. In practice, the joint stock limited liability company is generally a large-scale enterprise. Article 57, paragraph 2 of the Company Law (2018 Revision) provides that “One-person limited liability companies referred to in this Law shall mean limited liability companies with only one natural person shareholder or one legal person shareholder”. Compared with Limited Liability Companies and Joint Stock Limited Companies, the most obvious feature of a one-person limited liability company (hereinafter referred to as a “one-person company”) is the single shareholder, which is the main reason why a one-person company is unable to form the institutional structure of shareholders’ meetings, board of directors, supervisory board and also makes it hard to differentiate the distinction between a company and its shareholders in terms of property, business, and personnel [3]. Therefore, China introduced the “one-person company” in 2005, and stipulated under the Company Law (2005 Revision) in the form of special provisions. Or, according to different positions, it could be regarded as some certain “restrictions” on the operators and controllers (single shareholders) of one-person companies. Such specific restrictions include: 1. The “minimum capital contribution” for the establishment of a one-person company shall be not less than 100,000 RMB [4]; 2. A natural person shall invest in a one-person company only. Such a one-person company shall not invest in the setting up of a new one-person company; 3. In the case of piercing the corporate veil [continua..]