Due diligence | 2023-01-26
A shell company is often without active business and significant assets and is sometimes used illegitimately. Therefore, identifying a company's actual business is an essential due diligence procedure for safe trade.
As the old saying goes, no news is good news, i.e., having no information means that alarming developments are unlikely. However, this does not apply to a company's background check or due diligence.
If the information in the company search results is limited, it might indicate that the company has inadequate operation records.
For example, if there is no contact number, website, or email in the results, one should remain vigilant and conduct further procedures to understand the company.
On the contrary, if a company has an administrative penalty record for fire safety issues in its factory, this is evident that at least the company has such a manufacturing site.
In a company search report of a Chinese company, it should have information about its status. We listed the common ones as the following:
Except for "Subsisting," the above-listed status may suggest the company is not in normal business operation.
In China, the market regulator, the State Administration for Market Regulation ("SAMR"), conducts annual inspections randomly. Negative results of such examinations suggest the company has no real business. Such results usually include the following:
The company search result indicates the size of a company, such as registered capital, paid-in capital, and employee numbers with social insurance records.
For example, if a company has a registered capital of RMB40 million but zero was paid in and is with only one employee. At the same time, the company claims it can complete an RMB100 million project, which is a red flag that needs to be assessed.
A business address is mandatory when registering a company in China. One can also use a shared office company registration. But if you find the registered address of a company is in a residential building or a PO box address, you should pay attention to this and further verify the business.
Last but not least, if two or even two-hundred companies have the same contact number in their company profiles, this is an obvious risk indicator that the companies may be shells without real business.
Sharing a contact number is possible. If a third-party agent manages the administrative matter of a company, the agent may use its contact number for all the companies it serves. But this is a sign that the company has no resources to deal with the basic administrative and financial matters, as well as maintain a proper contact channel for business.
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We write articles about knowledge and insights for conducting company searches and due diliegnce for Chinese companies. The articles are based on our extensive local experience.
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