A shelf corporation is a paper or shell corporation that is administratively formed and then “put on a shelf” for several years to age. The term “shelf” or “aged” only refers to the fact that the company has already been shelved and is sitting “on a shelf” waiting to be bought.
A shelf corporation is a business that was created years ago for the sole purpose of selling itself in the future simply for its age value. A person forms a company and does nothing with the corporation other than file the annual reports and pay the annual fees. Once the corporation is a few years old, it has a kind of value to the right person.
Historically, shelf corporations were considered a legitimate way to streamline a start-up. They were especially useful before the introduction of electronic registration, when the formation of new corporations used to take months. Selling them as vehicles to circumvent credit guidelines is fairly new. Shelf corporations are also called aging corporations, seasoned shelf corporations, off-the-shelf companies, and shelf corps. It is NOT the same as shell corporations. Shell corporations are entirely different entities, both in scope and formation, and typically have no significant assets or operating structure.
A shelf corporation is not involved in any real business. Most shelf corporations have been totally dormant. They have never had income, assets or bank accounts, operations or activity of any kind. During the aging period, some effort may be made to establish a credit history, file basic tax returns, open a business bank account, and other simple actions to demonstrate some activity. These types of shelf corporations are more valuable and sell for more money.
Corporations are legal and have legitimate purposes. They have been used by someone who would not otherwise qualify for a bank loan, line of credit, or government contract because they or their current business do not have the required credit scores or an established business history of two to five years. A long-established business might qualify for more credit and financing. A business that has been open for 10 years will seem more credible than one that just opened this year. This could help secure more credit and financing, as most companies fail in four years, with only a small percentage making it to 10 years or more.
Shelf corporations provide a few benefits, including establishing an instant track record for a company, improving the image of the company, and even making it faster to launch business endeavors because the company is already formed and ready for immediate delivery and faster to obtain business licenses. And inactive corporations give you faster ability to bid on contracts, saving time by forgoing the time and expense of forming a new corporation and the longevity of corporate filing.
A business is “founded” when they initially set up their corporation. Many potential business resources are hesitant to hire new or emerging corporations. The age of your business can give you more credibility with customers and lenders than a business that was recently established. Let’s say you were an accountant for 10 years, but you just opened your business. By purchasing an old corporation that has been open 10 years, you can advertise that you have been in business for 10 years, and your corporate records back that up as well.
Often people buy such companies in Nevada, Wyoming or California, as well as Delaware, due to regulatory considerations. Reserve corporations include articles of incorporation, “Sole Incorporator Action” document transferred to you by the company, meeting minutes (blank sample forms), a corporate kit (log book), and stock certificates (blank shares , not issued). It also includes a corporate seal, corporate bylaws (unsigned forms), registered agent service, and federal tax identification number.
Regulators, lenders or business reporting agencies do not look unfavorably on corporations. Many say they are unethical, borderline illegal, and some call them fraud.
From Dun & Bradstreet… “It is unclear whether it is legal to use dormant corporations to access credit. However, it is clear that this is a deceptive and unethical move that serious business owners should avoid.” If the credit bureaus find out that the company is under new management, they will include it in their reports, effectively “reaging” the company.
“Shell and shell companies can be created domestically or in a foreign country. Shell and shell companies are often formed by individuals and companies to conduct legitimate transactions.
However, they can be and have been used as vehicles for common financial crime schemes such as money laundering, fraudulent loans, and fraudulent purchases. By virtue of the ease of formation and the absence of ownership disclosure requirements, shell companies are an attractive vehicle for those seeking to engage in illicit activity.” FDIC Special Alert, April 24, 2009.
Many lenders now view the start date of the bank account as the start date of the corporation. Most off the shelf corporations do not come with established bank accounts. Some dormant corporations have real credit problems, making it harder to get financing, not easier. Most lenders know what to look for to see if the corporation is a dormant corporation. Things like your business’s bank rating could tip them off. Public records also show the change of ownership, raising red flags.
Dormant corporations are NOT required to build business credit. Using a dormant corporation is not the best way to build business credit. Due to their cost and potential problems, they may actually hurt you more than they can help. The best way to build business credit is to work with vendors who approve new business, as many do. The best way to get financing is to use collateral or have your business generate cash flow. Other ways to get financing are to use good credit partners to get unsecured financing.