What Are Shelf Corporations? And Are They Legitimate?
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Building a business can take a lot of time and effort, especially when it comes to building your company’s credit history.
Shelf corporations, also sometimes called shelf companies or aged corporations, were designed to help accelerate this process.
But many experts consider shelf companies to be a gray area, especially if a new business owner uses one to obtain credit that they wouldn’t have qualified for otherwise. Shelf corporations are usually associated with a lot of shady activity.
We want to make it clear that CreditStrong does not endorse the buying of shelf corporations for business financing purposes. Most lenders consider this fraud – we’ll go more into detail below.
For educational purposes, here is what they are and why you should avoid them.
What Is the Purpose of a Shelf Company?
Shelf corporations allow new business owners to effectively skip the process of establishing a solid track record of business history and business credit. This is often necessary to obtain financing, engage in real estate agreements, and perform other critical business activities.
This is because creditors are often wary of dealing with brand-new businesses, and for a good reason.
According to the U.S. Small Business Administration (SBA), only two-thirds of small businesses with employees survive the first couple of years, and half are out of business within five years.
Many lenders simply aren’t willing to try to mitigate the risks associated with such a high failure rate, even with personal guarantees.
A shelf corporation is a company that’s established and then effectively “put on a shelf”. The company typically doesn’t engage in any business activities and may not even have any assets. But owners take steps to establish a business credit history for the company.
Oftentimes, these companies also have an employer identification number (EIN), a record of annual tax returns, business bank account, and more.
Once the shelf corporation is sufficiently established — which can take several months or even years — shelf corporation owners sell their companies to new business owners.
Depending on how long the company has aged and the quality of its credit history, prices can range from $650 to $10,000.
Shelf corporations are often formed in states with business-friendly regulations, including tax benefits, low filing fees, a higher level of anonymity, and more. Common states for aged shelf corporations include Delaware, Montana, Nevada, Texas, and Wyoming.
Shelf Companies vs. Shell Companies
If you’ve never heard of a shelf company before, you may be wondering if it’s similar to a shell company. But while they sound similar, they’re used for different purposes.
While a shelf company is used to help new business owners take certain shortcuts, a shell company is designed to hold money for an individual or another company.
Shell companies typically don’t have any business operations of their own, and they’re often formed as offshore corporations.
There are some legitimate purposes for shell companies. For example, they can be a good way for public figures to keep information about their residence private. They can also be used by corporations to protect trade secrets from their competitors.
However, shell companies are also sometimes used for tax evasion, money laundering, and various forms of fraud.
Are Shelf Corporations Legal?
Technically, establishing and maintaining a shelf corporation is legal. But buying a shelf company to take advantage of its benefits is considered a gray area by many business experts, and there are some risks involved for people who use them.
You Could Be Committing Fraud
For most business owners, the primary reason for purchasing a shelf corporation is to use the business credit history to obtain financing that they wouldn’t otherwise be able to access.
This could be considered credit fraud because you’re misrepresenting your creditworthiness as a business owner.
As a result, using a shelf corporation to get access to a seasoned business credit history may not be in your best interest.
You Could Be a Victim of Fraud
Some sellers of shelf corporations intentionally engage in fraudulent activity by selling companies that don’t necessarily provide the benefits that the buyer is looking to receive. If this happens to you, you could be out hundreds or even thousands of dollars with no recourse.
You’ll Be Responsible for Liabilities and Lawsuits
When you buy a company, you also buy its liabilities. If the seller has taken the initiative to establish a business credit history, that means they had to take on credit in some form or another. If any of that credit is lingering, you’ll be responsible for making the monthly payments.
Also, if the shelf corporation was the defendant in any lawsuits before the sale, those legal troubles don’t go away when ownership is transferred to you.
The Safer Choice: Establish Your Own Business Credit
As tempting as it may be to piggyback on a shelf corporation’s business credit history, the potential risks involved with credit fraud are too great to ignore. Building business credit isn’t easy, lenders would have to take a huge risk on you and your business. That’s why Credit Strong Business Credit builder loan was created. Because it helps business owners start building business credit with an actual FDIC bank Building business credit hasn’t been easier
Here are the steps you can take to establish your business credit history the right way and avoid committing or falling victim to fraud.
1. Get an EIN
You can’t establish a credit history for your business unless you’ve established it as a separate entity, which you can do with an EIN.
2. Open a Business Bank Account
Commercial lenders may balk at offering you financing if you don’t have an established business bank account. Not only does such an account add legitimacy to your business, but it also helps ensure that you keep your business and personal expenses separate.
3. Take Advantage of Vendor Credit
When you’re just starting out, it can be difficult to get a term loan or a line of credit for your business. If you are already working with vendors for certain supplies, inventory, or services, ask if they offer vendor credit.
This arrangement allows you to pay your invoices in 30, 60, or 90 days instead of at the time of the purchase. Also, make sure that your vendor will report your payments to the commercial credit bureaus. If it won’t, consider switching to one that will.
4. Open a Business Credit Card
Business credit cards can be a great way to build your business credit score because you technically don’t have to pay interest as long as you pay your bill in full every month.
Also, be sure to keep your balance relatively low compared to the credit limit, and if your card offers rewards and other perks, learn how to maximize them.
5. Get a Business Credit Builder Loan
Here at Credit Strong, we realize how tough it can be to establish business credit for the first time. That’s why we created a business credit builder loan.
It allows you to build your business’s credit history and savings at the same time. Businesses as young as 3 months old qualify, even if your business has absolutely no credit history. Find out more about how it works here.
6. Pay On Time, Or Even Early
Making on-time payments is the most important thing you can do to build your business credit score. With some scores, including the PAYDEX Score, paying 30 days early will help you achieve the highest score possible.
7. Monitor Your Business Credit
It may take several months for your business credit history to get established, but once you have credit accounts in place, be sure to track your business credit score so that you can understand how your actions impact it.
This habit can also help you spot potential issues and address them before they get out of hand.
The Bottom Line
Shelf corporations are real business entities that are often used for illegitimate purposes.
While the idea of skipping the years-long process of establishing a business credit history and relationships with banking institutions sounds appealing, it’s important to understand the risks involved with these types of companies.
It’s better to take the time and establish your business, its credit history, and its other financial relationships the traditional way.
Though this might seem daunting, especially compared to the ease and convenience that shelf companies provide, you’ll have a better chance of avoiding the more troubling— and potentially illegal— aspects of aged corporations.
CreditStrong for Business is the only 0% interest business credit builder in the nation