UNLIKE OTHER COUNTRIES, sole traders in China have traditionally been defined in law in terms of “households” or hu [户]. This column outlines the emergence of households as vehicles for individual businesses in China, identifies and compares the two types of sole trader households, and considers their ongoing relevance and possible reform.
What is a sole trader?
In most jurisdictions, a sole trader has three core characteristics. First, unlike most commercial organisations such as partnerships that require multiple investors, there is only one investor, and this sole investor must be a natural person. Second, the operation of a sole trader is highly centralised – a single unit, which is generally operated directly by that sole trader. Third, as the formation of a sole trader relies on the existence of a natural person, the business generally does not possess a legal personality that is fully independent of the sole trader. As a result, the investor or sole trader assumes responsibility in the form of unlimited liability.
Accordingly, in the event of business failure, bankruptcy or debt recovery, creditors can look through the business to the personal liability of the sole trader. The individual is therefore at the centre of the concept of the “sole trader”.
Sole traders in China
In China, there are two types of households: individual industrial and commercial households [个体工商户]; and rural contractual management households [农村承包经营户]. The former are currently the main legal type of sole traders in towns and cities, while the latter are mainly farmers in rural areas who engage in individual business.
Linguistics provides a way of understanding the meaning of the household [户] within the concept of the family [家]. The original meaning of hu [户] was a door within a house [房]. As the door was a functional part of the house, the term hu came to be used to describe different ways in which a family functioned or operated in a business or farming context. In other words, it came to be used as a reference to the operating unit of the family.
The two household types took shape after the reform and opening-up policy of 1978. They were first explicitly defined by law in the General Principles of the Civil Law, adopted in 1986. A unique feature of Chinese law is that, although households are synonymous with the individuals who run them, they can engage in civil and commercial activities in their own name, and sue and respond to lawsuits independently.
The evolution of households can be divided into two stages. Between 1949 and 1978, their development was significantly limited, largely because the state gave priority to the development of the state-owned and collective economy over the individual economy.
At some points, the individual economy was prohibited completely. For example, article 5 of the 1975 constitution directly stipulated that “at the present stage, there are two main types of ownership of the means of production in our country: socialist ownership by the whole people; and socialist collective ownership by the labouring masses”. Ownership of the economy by individual labourers, as stipulated in the 1954 constitution, was no longer recognised.
In the second stage (post 1978), the individual economy was revived. The 1982 constitution stipulated that “the individual economy in urban and rural areas is, within the limits prescribed by law, a complement to the socialist public economy”. Subsequently, in 1986, the General Principles of the Civil Law formally recognised “individual industrial and commercial households” and “rural contractual management households”. Detailed regulations on the two types of households were issued in 2011.
Comparing the two types of household
The two types of households differ in at least four respects.
- A rural contractual management household is generally collectively managed by a family, whereas an individual industrial and commercial household is often managed by an individual person;
- A rural contractual management household is more dependent on land as a result of its focus on agricultural operations;
- The members of rural contractual management households must be members of a rural collective economic organisation and hold an agricultural hukou (household registration). An urban resident cannot be a member of a rural collective economic organisation as a result of the household registration system; and
- An individual industrial and commercial household is required to be registered and is subject to regulation by a specialised regulatory body, the administration for market regulation [市场监督管理局]. In contrast, a rural contractual management household is not subject to a mandatory registration process.
Ongoing relevance
In China’s economy, where the state-owned economy occupies a dominant role, the concept of a household has been useful in terms of highlighting the family-oriented character of individual businesses and avoiding sensitivities associated with private businesses, particularly relating to the exploitation of workers.
In addition to policy considerations, the use of the household is also consistent with the nature of China’s family-household economy [家户经济], where there is a close relationship between the natural people that run a household and the objectives of that household, which extend beyond profit-making to include survival and livelihood. Individual industrial and commercial households tend to be concentrated in the repair, service, catering and handicraft industries. Most of them operate on a small scale and in circumstances where a family household can satisfy the basic human resources needs of its operation.
In the case of rural contractual management households, more traditional considerations apply. In particular, the collective participation of household members in farming has traditionally been well suited to China’s specific national conditions and the cultural practices of rural China.
Possible reforms
A few factors suggest that possible reforms may occur to the household system in the future.
- Internet technology has caused the focus of the two household types to shift from collective operation towards the efforts of specific individuals;
- Ongoing uncertainty exists in relation to the legal status of unregistered sole traders; and
- The legal distinction between family and household is often blurred, creating uncertainties in terms of how the law should be applied to resolve issues and disputes.
An example appears in the provisions of articles 56 and 57 of the Civil Code concerning the assumption of debts by the “two households”. Article 56 provides that “the debts of an individual industrial and commercial household shall be assumed by the personal property of the individual who operates the business; if the business is operated by a family, it shall be assumed by the family property; if it is not possible to make a distinction, it shall be assumed by family property”.
Article 57 provides that “the debts of rural contractual management households shall be assumed by the property of the household engaging in contracting for the operation of the rural area; if the business is in fact operated by a portion of the members of the household, it shall be assumed by the property of that portion of the members”.
These provisions are characterised by various concepts including household, individual and member; however, the provisions do not define these concepts. Accordingly, there is a lack of clarity in respect to the use of the legal concepts in the context of a household or a family, and where the boundaries should be drawn.
In conclusion, the development of individual business in China as a collective concept in the form of households appears anomalous by comparison with the experience of other jurisdictions; in fact, there are deeper considerations that explain the concept in China. In particular, the concept of the household has played an important role in supporting a commercial system that is conducive to the development of the individual economy.
The above column draws on a research paper written by the author and Dr Zhang Yang of Wuhan University School of Law.
Andrew Godwin previously practised as a foreign lawyer in Shanghai (1996 – 2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law. Andrew is currently Joint Associate Director of the Corporate Law and Financial Regulation Research Program at the Melbourne Centre for Commercial Law and Honorary Associate Director (Commercial law) of the Asian Law Centre. Andrew has acted as a consultant to a broad range of organisations, regulators and governments in Australia and abroad. He served as Special Counsel and Acting General Counsel of the Australian Law Reform Commission between 2020 and 2024.
