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Preface

The choice of enterprise form is the core legal decision for the creation and operation of a commercial entity, which profoundly affects its governance structure, scope of responsibility, financing ability and tax burden, and is of strategic importance. As the “institutional shell” given to commercial entities by the law, its choice not only concerns the simplicity or complexity of the creation process, but also profoundly shapes the rights, behavioral boundaries and liability attributes of the enterprise. The existence of enterprises stems from the substitution of market transaction costs, while different forms of enterprises are actually differentiated institutional designs to reduce internal organizational costs and external contractual costs. In the context of China's deepening market-oriented reforms, entrepreneurs and investors need to seek the optimal solution among multiple forms, and legislators also need to respond to the practical needs through institutional supply.20 The major amendments to the Company Law in 2003, such as the introduction of the authorized capital system and the permission to set up class shares, have further expanded the institutional flexibility of enterprise forms. The purpose of this paper is to take the Chinese Company Law as the core, systematically compare the jurisprudential basis and institutional differences of the major forms of limited liability companies, joint-stock companies (including listed companies), partnerships and sole proprietorships, and construct a multi-dimensional choice model that includes the allocation of control, segregation of liability, financing scale, tax planning and policy compliance, and, in light of the development trend of the digital economy and ESG, to propose that the decision-making of the corporate form should follow the “dynamic” principle. Combined with the development trend of digital economy and ESG, the model proposes that corporate decision-making should follow the principle of “dynamic adaptation”, which provides theoretical references for the practice of corporate legal affairs and the improvement of legislation.

1、Jurisprudential Basis and Institutional Comparison of Major Enterprise Forms

At present, China's enterprise forms are broadly categorized into limited liability companies (LLCs), joint stock companies (JSCs), partnerships, and sole proprietorships, and different enterprise forms have unique jurisprudential logic and institutional characteristics.

The limited liability company (LLC) is a classic example of closure and partnership. Its core advantage lies in the fact that shareholders bear limited liability to the extent of their capital contribution (Article 4 of the Company Law), which effectively isolates risks. The governance structure has a shareholders' meeting, a board of directors (or executive directors) and a supervisory board (or supervisors), but allows for autonomy of the bylaws (e.g., Section 46 of the Companies Act 2023 specifies that the bylaws may exclude the board's powers). The transfer of shares is strictly limited (Article 84 of the Company Law on the right of first refusal), which maintains the attributes of a “people's corporation” and is therefore particularly suitable for SMEs, start-ups, family businesses and other scenarios that emphasize the centralization of control and the trust of the shareholders.

The joint stock company (S.A.) is a precise template for capitalization and openness. Shareholders also have limited liability (Article 4 of the Company Law), but its governance structure is stricter, with a mandatory shareholders' meeting, board of directors, and supervisory board (listed companies are also required to have independent directors and an audit committee, Article 121 of the Company Law). Its greatest advantage is its strong financing capability, with the ability to issue shares (IPO) and bonds in public, and a strong capital aggregation function.2023 The authorized capital system, introduced by Article 152 of the Company Law, further enhances financing flexibility. Joint stock companies can be subdivided into non-public joint stock companies (with less than 200 shareholders and a certain degree of closure) and listed companies (strictly regulated by the Securities Law and exchange rules, with high disclosure costs).

Partnerships, on the other hand, embody a high degree of freedom of contract and joint and several liability. A general partnership (GP) requires unlimited joint and several liability of the partners (Article 2 of the Partnership Law) and is suitable for service organizations that rely on professional credit such as law firms and accounting firms. Limited partnerships (LPs), on the other hand, differentiate liability: general partners (GPs) have unlimited liability and limited partners (LPs) have limited liability (Article 2 of the Partnership Law), a structure that makes them the dominant form of private equity funds (e.g., Sequoia Capital China Fund). The governance of a partnership is highly dependent on the autonomy of the partnership agreement and has a flexible structure.

Finally, a sole proprietorship is characterized by the mixing of investor and enterprise personalities. The investor is required to bear unlimited liability for the debts of the enterprise with his personal property (Article 2 of the Sole Proprietorship Law). Its structure is simple and decision-making is efficient, but access to financing is extremely limited.

2、Multidimensional Decision Modeling for Corporate Form Selection

Different business forms have different advantages and disadvantages, so the choice of business form is not a one-dimensional consideration, but requires the comprehensive use of a “dynamic fit” model that includes factors such as the need for liability segregation, preference for control allocation, financing scale and channels, optimization of the tax burden, and policy and industry compliance.

In terms of liability segregation needs, high-risk areas (e.g., R&D, finance) strongly prefer LLCs or joint-stock companies, which utilize limited liability to build up a “legal firewall”, e.g., biopharmaceutical startups prefer LLCs to segregate the risk of R&D failures. On the other hand, in low-risk or credit-dependent areas (e.g. consulting, design), general partnerships are able to demonstrate creditworthiness through the unlimited liability of the partners (e.g. McKinsey's use of partnerships).

Control allocation preferences are a key factor. Firms with a strong need for founder control tend to choose either a limited liability company (relying on same-share rights and transfer restriction clauses) or a limited partnership GP, while a joint stock company is more appropriate if diversification and professional manager governance are pursued, especially if a same-share-different-rights structure is adopted (e.g., Xiaomi's Hong Kong IPO adopts AB shares).

Financing scale and channels directly determine the choice of form. Enterprises in need of large-scale long-term financing must choose a joint-stock company, as it has the legal capacity to issue shares and bonds, and the authorized capital system of the Companies Act 2023 (Article 152) gives the board of directors the flexibility to issue shares, which significantly improves efficiency. For enterprises relying on venture capital financing, limited partnerships (e.g. High Tide Capital) are the industry standard, which perfectly fits the needs of professional management by GPs and passive investment by LPs.

Tax burden optimization is also an important consideration. Partnerships and sole proprietorships have the advantage of avoiding “double taxation” due to the adoption of a pass-through tax system (tax on dividends or personal income tax only). Joint-stock companies are more likely to meet the conditions of high-tech enterprise certification and enjoy specific tax incentives (e.g. 15% income tax rate).

In addition, policy and industry compliance requirements constitute a hard constraint. For example, financial and education industries often have form restrictions (e.g., commercial banks must adopt the form of joint-stock companies), and state-owned enterprises usually need to choose limited liability companies or joint-stock companies in order to comply with the requirements of state-owned capital supervision.

3、The Innovative Impact of China's Company Law Revision (2023)

The 2023 revision of the Company Law significantly enriches the institutional supply of corporate forms and profoundly affects the logic of choice. The class share system (Article 144) allows for the issuance of preferred shares, special voting shares, etc., which allows for a highly customized shareholding structure that meets the different needs of different investors (e.g., the “same shares, different rights” structure that Ant Group had planned to use for its IPO). The Authorized Capital System (Article 152) allows the Articles of Association of a joint stock company to authorize the board of directors to flexibly issue new shares within the amount of authorized shares, which significantly enhances the efficiency of financing and makes the joint stock company more attractive to enterprises in the fast-growing period. Meanwhile, the amendment's improvement of the contribution registration system for limited liability companies (Article 47) strengthens the responsibility of shareholders to make capital contributions, and guides investors to make a more rational choice of business form based on their ability to make contributions. Taking Nongfushanquan Co., Ltd. as an example, its reorganization from a limited liability company to a joint stock company and its eventual listing in Hong Kong fully reflects the value of the form change: it has gained access to financing in the international capital market, has been able to utilize the H-share rules to implement equity incentives, and has significantly enhanced its brand credibility and transparency; of course, this is accompanied by costs such as strict financial disclosure and regulatory pressure.

4、Emerging Trends and Dynamic Adaptation of Corporate Form Choices

Corporate form choices must respond to changing times. New types of organizations, such as DAOs (Decentralized Autonomous Organizations), spawned by the digital economy have posed new challenges to the responsibility and governance rules of traditional forms, and the rise of ESG compliance requirements has also brought about impacts: listed companies face higher governance costs due to stringent ESG disclosure requirements, whereas non-public companies may be able to gain access to financing due to good ESG ratings.

More importantly, the choice of corporate form should follow the principle of “dynamic fit”, adjusting to the evolution of the corporate life cycle. Typical paths are: at the start-up stage, a simple, low-cost sole proprietorship or partnership may be chosen; at the growth stage, a limited liability company (LLC) is often chosen to balance control, financing and risk segregation; at the expansion stage, when large-scale expansion is needed, a non-public joint-stock company (NPJC) becomes a better choice; and at the final stage of maturity, an enterprise that seeks to raise capital in the public market or to enhance its credibility may move towards a public company (or IPO). or go public.

5、Conclusion and Recommendations

Finally, the choice of corporate form is a complex decision that combines legal rationality and business wisdom, and there is no universal optimal solution. China's Company Law (2023) has significantly enhanced the institutional competitiveness of joint-stock companies through innovations such as class shares and authorized capital systems, but the person-to-person nature of limited liability companies and the tax-penetration advantages of partnerships remain irreplaceable.

The practical suggestions for enterprises are: to carry out a three-dimensional comprehensive assessment of “legal-financial-strategic” to avoid the pitfalls of one-dimensional decision-making; to attach great importance to the personalized design of the articles of association or partnership agreement, and to maximize the space for autonomy within the statutory framework; and to establish a dynamic review mechanism of the form, and make timely adjustments in accordance with the changes in the scale of the enterprise, the industry environment, and the demand for financing. Adjustments should be made at the right time according to the changes in enterprise scale, industry environment and financing needs.

Suggestions for legislators look to the future: vigilance should be exercised and explored to prevent the risk of abuse of limited liability brought about by the “generalization of limited liability companies” and to protect the interests of creditors; the regulatory rules for non-public joint-stock companies should be improved, and a delicate balance should be struck between the promotion of financing facilitation and the protection of investors; at the same time, prospective studies must be conducted on the following At the same time, it is necessary to prospectively study the legal positioning of new organizational forms (e.g., DAOs) and reserve institutional space for continuous business innovation.

In the final analysis, the essence of enterprise form is “a set of legal nodes of contractual relationship”. Its choice not only determines the organizational form, but also profoundly defines the survival logic and development boundary of the enterprise in the market ecology. Only through a deep understanding of its institutional core, can we effectively harness the power of the form and create a solid and lasting business foundation.