A shelf corporation is a paper or ghost corporation that is administratively formed and then “shelved” for several years until it ages. The term “shelf” or “aged” only refers to the fact that the business has already been archived and is sitting “on a shelf” waiting to be bought.
A corporation is a company that was created years ago for the sole purpose of being sold in the future simply for its seniority value. A person forms a business and does nothing with the corporation other than file annual reports and cover 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 optimize a startup. They were especially useful before the introduction of electronic registration when the creation of new corporations used to take months. Selling them as vehicles to get around credit guidelines is fairly new. Shelf corporations are also called aging corporations, seasoned shelf corporations, trading companies, and shelf corporations. It is NOT the same as shell corporations. Shell companies are completely different entities, both in scope and formation, and generally do not have significant assets or operating structure.
A shelf corporation is not in any real business. Most of the 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 can 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 corporations are more valuable and sell for more money.
Corporations are legal and have legitimate purposes. They have been used by someone who might 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 an established business history of two to five years. A long-established business may qualify for more credit and financing. A company that has been open for 10 years will seem more credible than one that has just opened this year. This could help secure more credit and financing, as most businesses fail in four years and only a small percentage make it to 10 years or more.
Shelf corporations provide some benefits, including establishing an instant track record for a business, enhancing the company’s image, and even making it faster to pursue business endeavors because the business is already formed and ready for immediate delivery. and faster to obtain business licenses. And shelf corporations give you a 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 company is “founded” when they initially set up their corporation. Many potential business resources are hesitant to involve new or fledgling corporations. The age of your business can give more credibility to customers and lenders than a newly established business. Let’s say you were an accountant for 10 years, but you just opened your business. By buying an old corporation that has been open for 10 years, you can advertise that you have been in business for 10 years, and your corporate records back that up too.
Often times, people buy these companies in Nevada, Wyoming, or California, as well as Delaware, due to regulatory considerations. 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 share 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, almost illegal, and some call them fraud.
From Dun & Bradstreet … “It is not clear whether it is legal to use corporations to access credit. However, it is clear that this is a misleading and unethical move that serious entrepreneurs should avoid.” If the credit bureaus find out that the company is under new management, they will include it in their reports, effectively “re-aging” the company.
“Shell companies and shelves can be created in the country or in a foreign country. Shell companies and shelves are usually formed by individuals and companies to carry out 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 training and the absence of ownership disclosure requirements, shell companies are an attractive vehicle for those seeking to engage in illicit activities. ”FDIC Special Alert, April 24, 2009.
Many lenders now view the bank account start date as the corporation start date. Most corporations do not have established bank accounts. Some corporations have real credit problems, making it difficult to obtain funds, it is not easier. Most lenders know what to look for to see if the corporation is a shelf corporation. Things like your company’s bank rating could alert them. Public records also show the change in ownership that generates red flags.
Corporations are NOT necessary to generate commercial credit. Using a corporation is not the best way to build business credit. Due to their potential expenses and problems, they can actually hurt you more than they can help you. 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 obtain financing are to use good credit partners to obtain insecure financing.