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In 2002, China promulgated the SME Promotion Law, which emphasizes SMEs’ scientific and technological innovations and upgrading. In 2004, China amended the constitution to grant non-state-owned firms a legal status (Chen, 2006; Zhu & Sanderson, 2009). Since most SMEs are non-state-owned, such a legislative move shows China’s broad acknowledgement of the importance of the private sector, which in turn is conducive to the further development of SMEs.

https://personal.utdallas.edu/~mikepeng/documents/Peng11APJM_ZhuWittmann.pdf

What were the negative effects that private companies had to face due to a lack of legal status in China? The paper mentions that China amended the constitution to grant private firms a legal status. Before the granting of a legal status, what were the negative consequences that private companies in China had to face?

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    This seems a bit obvious... Without legal status, they were effectively part of the black (or at least grey) market. They couldn't use any of the functions of the state, such as enforcing contracts, banking, or openly deal with state owned business. or and the people who were part of such companies were subject to arbitrary arrest, detention and "re-education" (and often starving to death).
    – James K
    Commented Mar 15 at 21:03
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    You may also want to look at a source like journals.openedition.org/chinaperspectives/2922 for the constitutional differences. Previous versions implied property could only properly belong to the state or individuals, which makes small scale collective action difficult in terms of recouping investment.
    – origimbo
    Commented Mar 15 at 21:43
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    @JamesK Why would it be that "obvious"? The West has been importing Chinese goods from way before 2004. Western companies entered into joint venture contracts as well. These can't have all been state-owned enterprises as Chinese SOEs weren't all that high-performing in the past (or, arguably, nowadays). Plus, the happy days of Xi's coercive economic management were yet in the future. This seems more like something a mouth-foaming anti-Communist would say than a sober assessment of what the pre-reform situation might haved looked like.
    – Italian Philosopher
    Commented Mar 15 at 22:46

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One comment says:

The West has been importing Chinese goods from way before 2004. Western companies entered into joint venture contracts as well. These can't have all been state-owned enterprises [...]

Indeed they were not. The source cited by the OP is a bit misleading. Private enterprises had been constitutionally authorized earlier in the PRC (1988), as the source found by origimbo details:

The post-Mao economic reforms saw the emergence of private enterprise, defined as “a privately funded economic entity which employs at least eight persons”. Article 11 of the Constitution was then amended in 1988 to “permit the private economy to exist and to develop within the limits prescribed by law” and defines such an economy as a complement to the socialist public economy. Here, the private economy refers to the economy in the form of private enterprises as defined by law.

And about 10 years later (before the 2002 SME law), the constitution was changed again:

Through the 1999 constitutional revision the individual and private economies were no longer defined as a complement to the socialist public economy; they were treated as “an important component of the country’s socialist market economy”.

What the 2004 revision did was to further remove some "discrimination" against private enterprises:

there is a clear need to accord constitutional protection to these new forms of the private economy, hence the insertion of the phrase “other non-public economy” into Article 11 through the present revision. Though the phrase is an ambiguous one, it is meant to embrace the various existing and emerging forms of private business, including foreign investment in China. In addition to providing protection, the revision further adds that the state will also provide encouragement and support to the development of the non-public economy. By doing so, the private sectors final achieve equal status with their public counterparts in most economic activities.

And not coincidentally the 2002 law was a SME Promotion Law.

One difference that remained though in article 13:

While private property is not deemed sacred, as is public property, it is now declared inviolable. [...] the use of the adjective “lawful” in front of private property is not redundant; it is used to address the fear that illegally acquired property might become untouchable.

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