In China, for a sole shareholder company, proving that the company’s assets are independent from the shareholder’s personal assets is a crucial legal obligation. This distinction helps avoid the shareholder being held jointly liable for the company’s debts. Based on Chinese laws and judicial practices, this article outlines the key evidentiary elements and provides both positive and negative case studies for reference.
I. Key Elements to Prove Asset Independence
1. Annual Audit Reports – The “Gold Standard”
Legal Basis:
Article 208 of China’s Company Law requires companies to prepare annual financial reports audited by a certified accounting firm.
Judicial Expectations:
The audit must cover the entire period during which the debts arose. Audits done retrospectively or submitted during litigation may not be accepted.
The report must explicitly conclude on asset independence. Generic reports that only reflect liabilities or profits without addressing asset segregation may be rejected.
Positive Case Example:
In case No. (2024) Yue 01 Min Zhong 2205, the Guangzhou Intermediate Court ruled in favor of the shareholder who submitted audited reports spanning the relevant debt period. These reports clearly stated that company assets were independent from the shareholder’s. As a result, the shareholder was exempted from liability.
2. Separation of Bank Accounts – The Basic Defense Line
Prohibited Practices:
Using personal accounts to receive company funds or using company accounts for personal expenses is seen as strong evidence of commingling.
(See Supreme People’s Court Case No. (2020) Supreme Min Zai 168)
Proper Fund Handling:
All financial transactions between the shareholder and the company must be backed by written agreements, specify the purpose, and be properly recorded in the accounts (e.g., loans must include interest).
3. Complete Financial Records and Governance
Companies should maintain:
--Full accounting documentation (contracts, invoices, bank statements),
--Proof of asset ownership (registered under the company name),
--Internal governance records (e.g., shareholder resolutions, dividend declarations).
If company operations involve shareholder-owned assets (like real estate), a formal lease agreement with fair-market rent must be in place.
II. High-Risk Practices in Chinese Judicial Practice
1. Failure to Conduct Audits
Example:
In a 2025 case before the Beijing No. 3 Intermediate Court, a shareholder named Mr. Wang was held jointly liable for a 2 million yuan company debt because the company failed to perform annual audits and could not prove asset separation.
2. Mixing of Accounts
Example:
Mr. Wang received advance payments from customers in his personal account on behalf of the company. This resulted in the court directly assigning him joint liability.
3. "Husband-and-Wife" Companies
Even if not legally defined as a sole shareholder company, courts may treat jointly-run businesses between spouses as a “de facto sole shareholder company” if no financial separation exists. This can lead to a reversal of the burden of proof.
III. Case Studies
✅ Positive Case: Shareholder Successfully Proved Asset Independence
(Guangzhou Intermediate People’s Court, Case No. (2024) Yue 01 Min Zhong 2205)
Background: Yuan Co. was the sole shareholder of You Co., and was sued to assume joint liability for You Co.’s debt.
Evidence Presented:
Annual audit reports for both companies covering the debt period.
Reports confirmed the separation of assets and compliance with accounting standards.
Court’s Ruling:
The court recognized the credibility of the audits, found no evidence of commingling, and ruled that the shareholder was not liable.
Key Takeaway:
Consistent and professional audits with a clear statement on asset independence are crucial.
❌ Negative Case: Shareholder Held Liable Due to Lack of Evidence
(Juye County People’s Court, 2025)
Background: Mr. Sun was the sole shareholder of a clothing company that owed an employee ¥10,471 in unpaid wages.
Core Issue: Mr. Sun failed to present any evidence proving asset separation.
Court’s Ruling:
Based on Article 23(3) of the Company Law, the court assigned joint liability to the shareholder due to failure to meet the burden of proof.
The court emphasized that receiving company payments through a personal bank account further supported the presumption of commingling.
Result: Mr. Sun’s personal assets were used to settle a minor company debt, underscoring the severe consequences of not providing evidence.
IV. Compliance Recommendations
1. Proactive Compliance
Complete the previous year’s audit by March annually, and ensure the audit includes a conclusion on asset independence.
If regular audits lack specific conclusions on asset segregation, commission a special-purpose audit.
2. Daily Risk Management
Company accounts should be used exclusively for business transactions.
Shareholder dividends must follow formal resolutions and include tax deductions.
Avoid appointing spouses or family members as company accountants to prevent confusion between personal and corporate identity.
3. Litigation Response
If sued, promptly compile audit reports, complete financial records, and bank statements to form a solid chain of evidence.
Even after transferring shares, the shareholder must provide evidence of asset independence for debts incurred during their holding period.
Conclusion
For sole shareholder companies in China, annual audit reports are the gold standard, and separate bank accounts are the survival baseline. Chinese courts impose strict standards of proof, and only by embedding financial compliance into daily operations can shareholders effectively safeguard the limited liability shield in the face of disputes.
