Part 1 in our series: Understanding Chinese Limited Companies
Dec. 8 – Due diligence when conducting business in China should always be a prerequisite, and this is the case whether or not you are considering purchasing or selling to a Chinese company, or a more formal arrangement such as a joint venture. A Chinese company business license can provide a great deal of information about the company which can be checked off as follows:
Name of the legally responsible person
Is this the same individual you have been dealing with? If there are any disputes, you need to know who the legally responsible person is.
Company name and registered address
Does this match up with your own understanding? If not, why?
Scope of business
Companies in China are restricted in what they can do, and their activities must be fully identified in their scope of business. If you’re dealing with a company whose business scope does not include the projected service or goods, you may face sudden disruptions of supply or service later on.
Length of operations
Business licenses are granted for a period of years. Although unless the company has been in transgression of the law licenses are usually renewed, it pays to make sure you know when the Chinese business license is up for renewal, just in case.
Amount of Registered Capital
This amount counts as the limited liability of the company, so it is important you know what this is. It makes little sense to extend decent credit to an under-capitalized business. However, Chinese businessmen do not always fully pay this amount up, and further checks as to the Capital Verification Certificate also need to be carried out to ensure the liability amount has been met in full.
Foreign companies conducting business in China are advised to ask for a copy of the Chinese company business license to examine at the very basic level the details of their activities.
Richard Hoffmann is a senior legal associate with Dezan Shira & Associates and is based in Beijing. The firm has nine offices in mainland China and has been operating in Asia since 1992. Please contact Richard for advice on corporate establishment, contractual, or due diligence issues within China.