Getting a business off the ground is difficult. Especially when your company has to meet age and business credit requirements for applying for business loans and government contracts.
Getting a shelf company has been touted as a way to get around those barriers to entry, but it can be more trouble than it’s worth.
What is a Shelf Corporation?
A shelf company is a company formed solely for the purpose of selling it in the future. Much like aging a bottle of wine, the shelf business is put away until it reaches a ripe age to sell.
Often this includes setting up related services such as:
- Business bank account
- Employer Identification Number (EIN)
- Sales tax return filed
- Established business credit
Shelf companies go by many different names, but it should not be confused with one shell company. Shell companies are often used to hide illegal transactions. Shelf companies can cross the line of legality, but they can also be used legally.
Other names for shelf companies include:
- Legacy companies
- Turnkey companies
- Credit ready companies
- Seasoned shelf companies
Typically, these types of companies do not engage in business activities and usually have no assets or liabilities when they are launched. The only exception is the state fees paid to maintain a good reputation.
Ideally, the shelf company buyer buys a mature company with a clean slate that helps them:
- Be eligible for bids on government contracts
- Present the appearance of company longevity and stability
- Skip the process of building business credit
- Avoid the paperwork of setting up a business
Shelf companies seem like a shortcut to single-handedly establishing an outdated company. However, it can also be considered fraudulent or deceptive if you use it to acquire business loans or other opportunities that require your business age to qualify.
Are Shelf Corporations Legal?
Shelf companies end up in a legal gray area. There are no official laws to remove them, but it can still create very real legal problems for you.
In any situation where the age or established business credit of the shelf LLC qualifies your business for a loan or other opportunity that you would not qualify for without it, you are taking a great risk.
For example, say you buy a 10-year-old shelf company with an established credit history so you can qualify for a government contract.
You win the contract but cannot meet the requirements because you are still a new company under the shelf company facade. When they investigate why your services are not in order, you may need a lawyer if the government decides to prosecute.
From there, a judge will decide the outcome and you may be guilty of fraud.
So while a shelf company may be able to give you what you want, it could potentially get you into trouble for misrepresenting your business.
According to ReutersSince 2007, Wyoming Corporate Services, which sells obsolete shelf companies, has filed multiple civil lawsuits against its registered companies. These lawsuits include alleged unpaid taxes, securities fraud and trademark infringement.
I don’t think that’s the kind of audience you want to mingle with.
How much are they?
There’s no getting around it, shelf companies are expensive. The older the existing business is, the more money it will cost you. Younger companies are sometimes more affordable and usually start around $650.
The one found on Wyoming business services allocate lower price ranges to the shelf LLCs that are only a few months old. At one year old, these prices rise to about $1,000.
With a company 15 years old or older, you may see prices up to $6,695. In one case, there was a recorded sale of a shelf company for $10,000.
Risks of Using a Shelf Corporation
To be honest, shelf companies have been used for some shady stuff – money laundering, tax evasion and scams, to name a few. Plus, there’s a risk that it might not even work for what you’re planning.
They are expensive
Compared to the cost of starting a new business the traditional way, buying a shelf company is a much more expensive venture. If you choose to buy a young shelf company to skip the paperwork of starting a business, then this may not be the best use of your resources.
As we mentioned earlier, a business with aging boards can run up to $10,000. You will be handing over at least $650 for a shelf LLC that is a few months old.
Unlike many years ago, starting a business has become relatively easy and cost effective for some industries. You can instead save that money for another business expense. Plus, it’s a lot of money to spend if there’s no guarantee it will work for the reason you need it.
They may have a negative history
Many old business salespeople claim that the companies they sell are clean slates with no assets, no liabilities, and no problems. That is not always true.
If you buy an old shelf company with established credit lines, you usually don’t know what’s on that credit report until after you buy it. That can entail any number of obligations associated with the business and since it is now yours, you are responsible for the business activity.
Many old business vendors also offer “nominated” officers and directors to hide the identity of the real business owner. The problem is you have no idea who the officer candidate is.
That leaves the potential for stolen identities or even someone with a criminal record acting as a corporate officer of your company. Worst of all, none of the information required for due diligence is offered by the old company vendors. So you find out after you have made an expensive purchase. That’s a serious buyer’s remorse.
They may not work
Sellers selling a business with an outdated shelf offer you a lot of potential benefits, but there are no guarantees that buying a business with an outdated shelf will work.
Do you use it to bypass credit and business age standards to get business financing?
Lenders can detect your scheme and deny your applications. And if you already have open trading lines with them, they may choose to close your accounts because you tried to circumvent their credit risk management system.
Old companies are not new. The government and most corporate lenders already know what to look out for and will quickly cut ties with your turnkey business.
How to establish business credit the right way
Today, starting a business is much easier than in previous years. Usually you can do everything online through your state website. It only takes a few days and a small fee to file the company registration. Making it significantly cheaper than buying an old shelf company.
From there, you can get a free EIN for your limited company in minutes through the IRS website. You can also register for a DUNS number for free.
While you won’t apply for business loans right away, you can start building legitimate business credit by opening other business credit accounts:
These are the easiest accounts to start with before you look for other forms of business financing. In many cases, there are options for business owners who have good personal credit scores but no business credit yet.
Two to three business lines of credit are suggested for the fastest credit growth. Make sure you always pay them on time. Unlike personal credit, being even a day late on your business credit payments can negatively impact your score.
Finally, you need to watch your eyes business credit to make sure everything is reported accurately. Following these steps will save you money from buying an outdated business by developing legitimate business credit instead.
Buying an outdated shelf company may seem like a worthy shortcut to an established company until you look further into it. In reality, it exposes you to significant risk, requires a large investment and can lead to legal problems.
Building credit the right way can take longer, but it’s not nearly as risky.
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