Six characteristics of a company without an actual business

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.

1. It lacks essential information in company search results.

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. 

2. Company status is abnormal.

In a company search report of a Chinese company, it should have information about its status. We listed the common ones as the following:

• Subsisting (存续): The company exists and is in normal operation.
• Revoked (吊销): Its business license has been revoked.
• Deregistered (注销): The company no longer exists.
• Suspended (停业): The company has stopped its business activities for some reasons.
• Liquidating (清算): The company is in the liquidation process.

Except for "Subsisting," the above-listed status may suggest the company is not in normal business operation.

3. There are negative government inspection results.

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 cannot be found at its registered or operational addresses; or 
• the company cannot be contacted through its filled contact numbers.

4. The presented business capabilities are different from the company's size.

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.

5. The registered address is vague.

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. 

6. The contact number is shared with other companies.

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.