Getting a business up and running is difficult. Especially when your business needs to meet age and business credit requirements to apply for business loans and government contracts.
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Getting a shelf corporation has been touted as a way to skip those barriers to entry, but it may be more trouble than it’s worth.
What Is a Shelf Corporation?
A shelf corporation is a company formed solely to sell it in the future. Much like aging a bottle of wine, the shelf corporation gets stored away until it reaches a ripe age to sell at.
Often this includes establishing related services such as:
Business bank accountEmployer Identification Number (EIN)Filed business tax returnsEstablished business credit
Shelf corporations go by many different names, but it’s not to be confused with a shell company. Shell companies are often used to conceal illegitimate dealings. Shelf companies might straddle the line of legality but they can also be used legally.
Other names for shelf corporations include:
Aged corporationsOff-the-shelf companiesCredit ready corporationsSeasoned shelf corporations
Typically, these types of corporations don’t engage in business activities and they usually don’t hold any assets or liabilities when they’re put on the market. The only exception is the state fees paid to maintain good standing.
Ideally, the shelf company buyer purchases a mature company with a clean slate which helps them:
Qualify for bidding on government contractsPresent the appearance of corporate longevity and stabilitySkip the process of building corporate creditAvoid the paperwork of establishing a business outright
Shelf companies seem like a shortcut to establishing an aged corporation on your own. However, it can also be seen as fraudulent or deceptive when using this to acquire business loans or other opportunities where your business age is needed to qualify.
Are Shelf Corporations Legal?
Shelf corporations land in a legal gray area. There are no official laws dedicated to taking them down, but it could still create very real legal issues for you.
In any situation where the age or established corporate credit of the shelf LLC qualifies your business for a loan or other opportunity that you don’t qualify for without it, you’re taking a big risk.
For example, let’s say you buy a 10-year-old shelf corporation with an established credit history so you can qualify for a government contract.
You win the contract, but can’t fulfill the requirements because you’re still a new business underneath the facade of the shelf company. When they investigate why your services are not up to par, you may need a lawyer if the government decides to prosecute.
From there, a judge decides the outcome and you might be on the hook for fraud.
So while a shelf corporation might get you what you want, it could potentially land you in hot water for misrepresenting your business.
According to Reuters, Wyoming Corporate Services, which sells aged shelf corporations, has had multiple civil lawsuits against the companies registered there since 2007. These lawsuits include alleged unpaid taxes, securities fraud, and trademark infringement.
I don’t think that’s the type of crowd you want to get mixed up with.
How Much Do They Cost?
There’s no getting around it, shelf companies are expensive. The older the existing business is, the more money it’ll cost you. Younger corporations are sometimes more affordable and typically start around $650.
The ones found on Wyoming Corporate Services assign lower price ranges to the shelf LLCs that are only a few months old. At a year old, these prices jump up to about $1,000.
With a 15 years or older company, you might see prices of 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 completely upfront, shelf corporations have been used for some shady stuff – money laundering, tax evasion, and running scams to name a few. Plus there’s the risk that it might not even work for what you’re planning.
Compared to the cost of starting a new company the traditional way, buying a shelf corporation is a much more costly venture. If you’re choosing to buy a young shelf corporation just to skip the paperwork of starting a business, then it might not be the best use of your resources.
As we mentioned before, an aged shelf corporation can reach up to $10,000. At the very least, you’re handing over $650 for a shelf LLC that’s a few months old.
Unlike many years ago, starting a business has become relatively easy and cost-effective for some industries. You could save that money for another business expense instead. Plus, it’s a lot of money to spend when there’s no guarantee that it’ll work for the reason you need it.
They Could Have Negative History Attached To Them
Many aged corporation vendors claim that the corporations they sell are clean slates with no assets, no liabilities, and no problems. That’s not always true.
If you’re buying an aged shelf corporation with established credit lines, then you usually won’t know what’s on that credit report until after you buy. That could mean any number of liabilities attached to the company and since it’s yours now, you’re responsible for the business activity.
Many aged corporation vendors also offer “nominee” officers and directors to conceal the identities of the real business owner. The issue is, you have no idea who the nominee officer is.
That leaves the potential for stolen identities or even someone with criminal records acting as a corporate officer of your company. The worst part is, none of the information needed for due diligence is offered up by the aged corporation vendors. So you find out after you’ve made an expensive purchase. That’s some serious buyer’s remorse.
They Might Not Work
Vendors selling an aged shelf corporation present you with a ton of potential benefits, but there are zero guarantees that buying an aged shelf corporation will work.
Using it to bypass credit and business age standards to get business financing?
Lenders might detect your scheme and deny your applications. And if you already have open tradelines with them, they may choose to close your accounts since you tried to circumvent their system for managing credit risk.
Aged corporations aren’t new. The government and most business lenders already know what to look for and will quickly cut ties with your ready made company.
How to Establish Business Credit the Right Way
Today, starting a business is much easier than in previous years. Most times 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 aged shelf company.
From there, you can get a free EIN for your limited liability company through the IRS website within a few minutes. You can also register for a DUNS number for free as well.
While you won’t be applying for business loans right out the gate, you can start building legitimate business credit by opening other business credit accounts:
Business credit cardsAccounts through suppliers and vendorsBusiness credit builder accounts
These are the easiest accounts to start with before seeking other forms of business financing. In many cases, there are options for business owners who have good personal credit scores but no corporate credit yet.
Two to three business credit tradelines are suggested for the fastest credit growth. Just make sure you pay them on time, every time. Unlike personal credit, being even one day late on your business credit payments can negatively impact your score.
Finally, you’ll need to keep an eye on your corporate credit to ensure that everything is reported accurately. By following these steps, you’ll save money on buying an aged corporation by developing legitimate business credit instead.
Buying an aged shelf corporation might seem like a worthy shortcut to an established business until you look further into it. In reality, it opens you up to a significant amount of risk, requires a large investment, and could result in legal trouble.
Building credit the right way might take longer, but it’s not nearly as risky.
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Source : Entrepreneur.com