Dan Harris of China Law Blog wrote today in this blog of their procedure for basic China due diligence, i.e. answering the question “is this China company legit?”
We do have some differences in opinion with Dan’s recommendations, though.
Below is the procedure described on China Law Blog with our comments.
“The first thing you do is ask the Chinese company to send you a copy of its business license. Do not be afraid to do this. Chinese companies do this all the time. If the Chinese company refuses to send this to you, walk away.”
Totally agreed. This is a basic, easy hurdle to put in front of the China company. However, as business licences are often faked (we’ve seen quite a range of fakes, from outrageously obvious ones to more subtle alterations), you need to make further checks to make sure it is a legit China company.
This is what a Chinese business license looks like:
Dan advises checking the China business license against what’s on record with the relevant authorities. This is one of our main activities at China Checkup, but it is also possible to do the checking process yourself.
It is actually possible to do this without asking for the business license first, using only the company’s name and location (which can be found out from the name in most cases). This may be useful if you wish to check a China company is legit before you even make contact with them.
Dan also suggests comparing some of the key details of the license — date of formation, location and business scope — with what the company claims on its website and elsewhere. Again, this is part of our routine to make sure they are a legit China company.
One thing we didn’t agree with, though, was Dan’s suggestion for using the registered capital shown on the licence:
“See the amount of registered capital. If the amount is too low, the odds are good that it is not a manufacturer. If the amount is really high, the odds are good that this is a big company.”
The issue here is that registered capital may not be what it seems to be. We previously wrote about how it’s relatively easy for Chinese companies to fake their registered capital.
This is often done with that exact purpose in mind – to mislead people using the registered capital to assess the size of the company and the scale of its operations.
Further, the China company registration system was changed in March 2014. One of the biggest changes was that there are no longer any restrictions on the amount of capital to register for new Chinese companies:
Apart from legal, legislative and other provisions, the lower limit for the amount of capital registration is to be abolished, the ratio of capital payment by shareholders or founders for the establishment of a company will no longer be restricted, and the payment of capital will no longer have a time limit.
Now the amount to register is up to the company itself, and the paid-up capital will not be shown on new business licenses.
It will of course be some time before this begins to show up on the Chinese business licenses most people see, but it any case the relevance of capital registration is set to diminish. [Update – January 2015: We are already seeing many cases of dubious newly registered companies with huge declared registered capital, but no declared paid-up capital]
To summarize, when asking the question "is this China company legit?", we advise that obtaining and verifying a China company’s business registration is China Company Verification, but be aware that their registered capital may not be quite what it seems.
China Checkup’s verification services make the process of verifying a Chinese company straightforward and pain-free. Our services can be conveniently ordered online, have guaranteed delivery times and our English-language PDF reports are sent direct to your email inbox.
If you are wondering “is this China company legit?”, then start your report today.
Although many factory's have their own laboratories, few of these are independently certified so requesting testing by external testing body is a wise move in many circumstances.
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