Starting a Small Business in China: Money and Legal Basics Before You Open

Most small-business disasters are not caused by a bad idea but by personal exposure nobody priced in. These are the money-and-law basics worth settling before you open.

1. Put in only money you can afford to lose

A sole proprietor repays debts from their own assets, and if it is unclear whether the business is a household venture, from the whole family's property. Even a limited company is not a guarantee: if it cannot repay creditors, capital you promised but have not yet paid in can be demanded early. Size your investment so that, if it all vanished, you could still pay the mortgage and medical bills. (The source found no verifiable official statistics on how many small firms survive, so it states legal consequences only.)

2. Don't sign a personal guarantee for a company loan, and keep your spouse out of it

Banks lending to small companies almost always ask the owner to sign a joint-and-several guarantee. That means a creditor can go straight to you without suing the company first. A "general guarantee" is weaker: the creditor must sue the company and exhaust its assets before coming to you. A spouse who also signs puts the household's assets in the pool, which makes the company's "limited" liability meaningless for you personally. You can still get the loan; just know what you are signing and keep the guaranteed sum within what you can afford to lose.

3. Choose the right entity

Sole proprietors and general partners are liable to the end: whatever is owed, they repay. Shareholders of a limited company are liable only up to the capital they committed, but that capital must actually be paid within five years, so registering 1 million yuan can mean a potential 1 million yuan debt. Mixing company and personal accounts can also make "limited" fall away. Keep accounts separate and don't register a big capital figure for show.

4. Never be a nominal shareholder or hold shares for someone else

Once your name is on the register you are legally a shareholder. If you committed capital you must pay it in; if other shareholders never paid theirs when the company was formed, you can be asked to cover the shortfall. The business is someone else's but the debt is in your name. Likewise, don't be a nominal legal representative or lend your ID to register a company: the company pays for harm you cause, then can recover from you.

5. File tax returns even with zero income

From the day you receive a licence you must file on time, even if you earned nothing: file the form with zeros. Not filing is fined up to 2,000 yuan, and 2,000 to 10,000 yuan if serious. Three months of not filing any tax type makes the system flag you as an "abnormal" taxpayer, and you can no longer issue invoices. Sole proprietors pay business-income personal tax: an advance within 15 days after each month or quarter, and annual reconciliation by 31 March the following year.

6. Invoices and small-taxpayer relief

Small-scale VAT payers whose sales are under 100,000 yuan a month (300,000 a quarter) owe no VAT, and the 3% rate was cut to 1% for the same period. But "finding someone to issue invoices to deduct cost" is false invoicing, with up to 3 years in prison and fines of 20,000 to 200,000 yuan. The exemption applies to VAT only; income tax is calculated separately. The VAT law took effect on 1 January 2026 and the thresholds did not change.

7. Anyone claiming to be the tax bureau and chasing you is a scammer

Tax authorities never ask for bank card passwords, payment passwords or SMS codes, and never give you an account to pay tax into. Hang up and call 12366, and file only through the official e-tax platform. If you already transferred money, call 110 or 96110 right away to freeze it.

8. Contract and payment terms

In Chinese contracts, label the payment as an earnest-money deposit (the legal term "dingjin" written with the character for "fixed"), not the near-identical word for an ordinary advance payment. Only the earnest-money deposit has the double-return rule: if you back out, you lose it; if the other side does, they return double (capped at 20% of the contract value). Specify a penalty amount. Treat credit terms like a loan: you are lending your money interest-free, and it becomes a bad debt if the buyer fails. Check the other party on the National Enterprise Credit Information system first.

9. Hiring

If an employee works a month without a written contract, you owe double wages from the second month up to a year. Register social insurance within 30 days of employment; failing to do so can be fined one to three times the contributions due. "Employee voluntarily gives up social insurance" has no legal basis.

10. Buy genuine goods and keep paperwork

Selling counterfeit goods can lead to a sentence of up to 3 years if profit reaches 30,000 yuan or sales 50,000 yuan, even if stock never sold. "I didn't know" fails when the buying price is far below market. Keep purchase contracts, invoices and payment records and the supplier's details. Refuse "free" stock from strangers with no paperwork.

11. If it fails, exit through the proper procedure

A company with no debts and no unpaid wages, taxes or social insurance can use simplified deregistration: all investors sign a commitment, and after 20 days of public notice without objection it is cancelled. Sole proprietors need 10 days. If you cannot pay your debts, apply for bankruptcy. Leaving the business unattended and failing to file annual reports for two years can lead to the licence being revoked, and the responsible legal representative cannot serve as one for three years.

Plan your numbers with our ROI calculator and loan calculator.

Source and license: adapted from HowToLiveBetter (高性价比人生指南) by eternity4719, Section 5 "Don't Waste Money", licensed under CC BY 4.0 (https://github.com/eternity4719/HowToLiveBetter). We condensed and translated the original entries; see the source for evidence grades and citations. Rules described here apply to mainland China and may change. This is educational content, not investment, tax or insurance advice.