Shelf Corporations… What You Should Know

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 filed and is sitting “on a shelf” waiting to be purchased.

Shelf corporations are also called aged corporations, seasoned shelf corporations, and off-the-shelf companies. Shelf corporations are NOT the same as shell corporations. They are completely different entities, both in scope and in formation. A shell corporation is a corporation without active business operations or significant assets. These types of corporations are not all necessarily illegal, but they are sometimes used illegitimately, such as to disguise business ownership from law enforcement or the public. A shelf corporation, in contrast, is a company that was created years ago for the sole purpose of being sold in the future simply for the value of its age.

Someone forms a shelf company and does nothing with the corporation other than file the annual reports and cover the annual fees. Once the corporation is a few years old, it has value for the right person. Historically, shelf corporations were considered a legitimate way to streamline a startup. They were especially useful prior to the introduction of electronic registration, when setting up new corporations used to take months to do. Selling them as vehicles to get around credit guidelines is fairly new.

A shelf corporation doesn’t engage in any real business. Most shelf corporations have been totally inactive. They have never had income, assets or bank accounts, operations, or activity of any kind. Shelf corporations are legal and do have legitimate purposes, in theory, They can be used by someone who may not otherwise qualify for a bank loan, line of credit, or government contract because they or their existing company does not have the required credit scores or a two- to five-year established business history.

For example, a long-established company might qualify for more credit and funding. A company that has been open for 10 years will look more credible than one just opened this year. This might help to secure more credit and funding as the majority of businesses fail within 4 years, and only a small percent make it to 10 years or more. It also may help the company gain the opportunity to bid on contracts, as some jurisdictions require that a company be in business a certain length of time to bid.

Often, people purchase such companies in Nevada, Wyoming or California, as well as Delaware, due to regulatory considerations. People who buy shelf corporation receive the following Articles of Incorporation: “Action of Sole Incorporator” document which transfers the company to you, minutes of meetings (blank sample forms), a corporate kit (record book), and stock certificates (blank, un-issued shares). Shelf corporations include a corporate seal, corporate bylaws (unsigned forms), registered agent service, and Federal Tax ID Number.

Shelf corporations are not looked upon favorably by regulators, lenders, or the business reporting agencies, and many say they are unethical or borderline illegal. Some even call them a fraud. From Dun & Bradstreet: “It is unclear whether it is legal to use shelf corporations to access credit. It is clear, however, that this is a deceitful, unethical maneuver that serious entrepreneurs should avoid.” If the credit bureaus learn about the company being under new management, they will list it on their reports, effectively “re-aging” the company.

Is this practice illegal? “Our conclusion was that it is clearly unethical and possibly illegal. I understand that small business owners are strapped for cash and unable to get loans, but they should stay away from these things. If you can’t get a loan from a bank, you need to look at other options and maybe even close your doors. It’s a bad time, but if you can’t secure capital with what your company has in assets, liabilities, and cash flow, you shouldn’t try to fool a financial institution.” —Bloomberg

Many lenders now look at the bank account start date as the corporation start date. Most shelf corporations don’t come with established bank accounts. Some shelf corporations have actual credit problems, making it harder to get funding, not easier. Most lenders know what to look for to see if the corporation is a shelf corporation. Things like your business Bank Rating could tip them off. Public records also show the change in ownership, which raises red flags.

They are also expensive, as some companies might charge $500-6,000. Some companies charge $20,000 or more, and cost depends on how long company has been in existence. If you purchase the corporation, you are now the owner and responsible for anything bad that may have happened with that company since the day it was incorporated. This includes back taxes, financial audits, lawsuits, and judgments.

They really aren’t needed in business credit building. Most vendors WILL approve new businesses for credit, even if they just opened. The key is to know which vendors can help a brand new business, and which ones can’t. Shelf corporations are NOT necessary to build business credit. Using a shelf corporation is not the best way to build business credit. Due to their expense and potential issues, they can actually hurt you more than they can help.