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.
A shelf corporation 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. A person forms a company and does nothing with the corporation other than filing the annual reports and covering the annual fees. Once the corporation is a few years old it has a sort of 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. Shelf corporations are also called aged corporations, seasoned shelf corporations, off the shelf company and shelf corps. It is NOT the same as shell corporations. Shell corporations are completely different entities, both in scope and in formation and usually have no significant assets or operational structure.
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. During the aging period some efforts may be undertaken 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 are sold for more money.
Shelf corporations are legal and do have legitimate purposes. They have been used by someone who may not otherwise qualify for a bank loan, line of credit, or government contract because they or their existing company do not have the required credit scores or a two to five year established business history. 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 four years, and only a small percent make it to 10 years or more.
Shelf corporations do provide some benefits including establishing an instant history for a company, improving company image, and even make it faster to pursue business endeavors because the company is already formed and ready for immediate delivery and faster to obtain business licenses. And shelf corporations gives you a faster ability to bid on contracts, saving time by foregoing the time and expense of forming a brand new corporation and corporate filing longevity.
A company is “founded” when they initially setup their corporation. Many potential business resources are hesitant to engage brand new or up-start corporations. The age of your company can give greater credibility to customers and lenders than a business that was recently established. Say you were an accountant for 10 years, but just opened your business. By buying an aged corporation that has been open 10 years, you can then advertise that you have been in business for 10 years, and your corporate records also support that.
Often people purchase such companies in Nevada, Wyoming or California as well as Delaware due to regulatory considerations. Shelf corporations include 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). It also includes a corporate seal, corporate bylaws (unsigned forms), registered agent service and federal tax ID number.
Shelf corporations are not looked upon unfavorably by regulators, lenders, or the business reporting agencies. Many say they are unethical, borderline illegal, and some 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.
“Shell and shelf companies can be created domestically or in a foreign country. Shell and shelf companies are often formed by individuals and businesses 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 purchasing. By virtue of the ease of formation and the absence of ownership disclosure requirements, shell and shelf companies are an attractive vehicle for those seeking to conduct illicit activity.” FDIC Special Alert, April 24, 2009.
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.
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. The best way to build business credit is to work with vendors who approve new businesses, as many do. The best way to get funding is to use collateral, or have your business generating cash flow. Other ways to get funding are to use good credit partners to obtain unsecure financing.