Ah, shelf corporations, the siren song of an easy path to an excellent business credit rating. But are they really?
Are there drawbacks to buying a shelf company? Are there any benefits to purchasing an aged corporation? Can they establish small business Fundability™ or add Fundability?
Are they legal?
What is a Shelf Corporation?
In our hurry up, get it done yesterday culture, business owners may understandably be looking for a shortcut or an easy fix.
The idea behind shelf corporations is that a startup, by definition, has little to no time in business. And, a startup often has few (if any) tradelines or other credit experiences.
So, rather than wait and build corporate credit the old fashioned way, a small business owner may be tempted to short-circuit the process by buying what’s called an aged shelf corporation.
Many business owners realize they’ll have to spend some money to get their business credit profile off the ground. But rather than giving their money to vendors, they decide it would be better to give their money to companies selling shelf corps.
A shelf corporation is a corporation on paper only. It was administratively formed, then ‘put on a shelf’ for several years to age.
The company is later purchased from a company like Wyoming Corporate Services, often to artificially inflate a company’s time in business, thereby theoretically making it easier to get corporate credit and business financing.
Shelf corporations can also go by other names:
- aged corporations
- off the shelf companies
- seasoned shelf corporations
- aged tradelines
- credit-ready corporations
Difference Between Shelf Corporation and Shell Corporation
A shell corporation is a corporation with no active business operations or significant assets. They are not all necessarily illegal. But they are sometimes used illegitimately. E.g. to disguise business ownership from law enforcement or the public. Legitimate reasons include a startup using the business entity as a vehicle to raise funds. Or to conduct a hostile takeover, or to go public.
Shell companies are also used for tax purposes. This means basing a company in a place where taxes are lower—but the rest of the company is located elsewhere.
It can easily get confusing because neither a shell company nor a shelf corporation actually does anything. Complicating matters is the two terms sounding (and being spelled) alike—and some companies selling/forming both.
Even more complex? A business could, technically, form a shell company and buy a shelf company. The former would be to decrease taxes; the latter would be to facilitate corporate credit building.
Often people buy shelf companies in Nevada, Wyoming, Montana, Texas, or Delaware due to regulatory considerations. In general, a shell corp is formed in places like Switzerland, but even in Delaware, Wyoming, and Nevada.
Are Shelf Corporations Legal?
Shelf corps were once a legitimate way to streamline a startup. They were useful before electronic registration existed, when setting up new corporations took months. However, selling them to get around credit guidelines is fairly new.
In theory, they can be used by someone who may not otherwise qualify for a bank loan, LOC, or government contract, if they or their existing company do not have the required credit score, or a 2 – 5 year established business history.
Shelf corporations can be used for the chance to bid on contracts. Some jurisdictions require a company to be in business for a certain length of time to be allowed to bid. Otherwise, a company cannot bid.
But that’s as far as their legitimacy (maybe) goes. D&B says:
“Thieves can purchase a 40-year-old corporate charter off the shelf, making them look well established and low risk. Creating and purchasing these aged shelf corporations, which adds creditor confidence and often drives automated decisioning rules, is legal. Using them with the intent for fraudulent purposes is not.
D&B has a history of red flagging shelf corporations. Therefore, they can erase your work building corporate credit if they catch your deception.
How Much Do They Cost?
The price of a shelf corporation depends on its age. At Wyoming Corporate Services (WCS), prices run from $645 for a shelf corp under one month old, to just under $7,000 for a fifteen-year aged shelf company with an EIN.
But the main attraction of an aged shelf corporation is its actual age. So it is puzzling that WCS offers corporations for sale that are only about three weeks old.
The attraction, possibly, is that the corporation for sale already has a name and is already incorporated. And it comes with a year of registered agent services. WBC claims they have “no credit or assets”, so, again, why would someone buy one?
Are there entrepreneurs in such a rush that they can’t even take the time to name their own companies?
At a competitor, prices for individual corporations don’t show unless you give them your personal information. For “super corps”, prices run into the mid-6 figures. But that company does show prices for business services. This includes a “Corporate Cash Credit Funding Program” for $1,999, promising an 80 PAYDEX score in 45 days.
This doesn’t even get into the high costs of web design or a business plan via this competitor.
Risks of Using a Shelf Corporation
If shelf corporations seem to you to be legally iffy, morally questionable, and potentially not worth the high cost, listen to your gut. Law enforcement agrees, since people have used aged corporations for money laundering, tax evasion, and more.
But there are other risks you may not have thought about.
Risk 1 — Buy the Corporation, Buy its Headaches
A shelf corporation with a nominee EIN could have a history attached to that aged EIN. Did anyone already use it to apply for credit?
If someone used the EIN for credit building, you don’t necessarily know its true credit history. This could drag business credit scores down.
If you buy the services of “nominee” officers, are they real people, or stolen identities? Do they have criminal records?
Which other corporations are they attached to? If it’s an industry legal in one state (say, non-medicinal cannabis sales in Colorado), but not yours, will it cause problems when a lender researches your business?
Risk 2 — They Are Expensive!
Beyond the cost of the shelf corporation, all the ancillary “services” are overpriced. You could spend $1,999 for a merchant account or, per Fundera, spend as little as $45 per month at one merchant account provider, with a $0.15 transaction fee.
Virtual offices? $2,000 annually at one shelf corp provider or $1,350 per year at WCS. Or pay $93/month for a Regus office membership ($1,116 annually) .
A registered agent is $135 yearly from WCS, and $350 from Wholesale Shelf Corporations. But if you register a registered agent directly with Wyoming, the cost is $50 annually.
Risk 3 — They Don’t Necessarily Work
When instructing how to read reports, D&B says, “users get a unique view into the ownership and management changes of a company since the date it first began operations. Each time a management or ownership change occurs, the report receives a new present control date.
Anytime a change of control happens in a business, it’s like it becomes a brand new business. If a company started in 1900 but underwent a control change two years ago, quite frankly it’s a 2-year-old business.”
Per D&B, buying a shelf LLC does no good because the corporation’s “aged” date is lost.
How You Should Establish Business Credit Instead
Building business credit uses your time and money far more productively. Corporate credit building isn’t just a score on a report. It’s also about building relationships with your suppliers and future lenders.
Short-circuiting this process doesn’t get you out of the hard work of relationship building.
Business reputation and goodwill are valuable. Performing one morally gray act can jeopardize your reputation in the local community. And it can affect your ability to attract new customers.
And the kicker is, shelf corps really aren’t necessary for business credit building. Many vendors will approve new businesses for credit. This is even if a business just began or is a startup. The key is knowing which vendors can help a brand new business.
At Credit Suite, it is our business to know which vendors report positive payment experiences to all three business credit bureaus. We regularly check, in order to make sure our information is as up to date and accurate as possible.
By applying for credit through vendors known to report payments, using that credit, and then paying it back on time, you establish corporate credit. This is a proven method—and you’ll be able to sleep at night, knowing that you took the ethical high road.
There are no shortcuts in life. The same is true for building business credit. One way people try to game the system is through buying shelf corporations. But if D&B or others catch you, it will hobble your funding efforts.
Regulators, lenders, and the business reporting agencies do not look upon favorably upon shelf corporations.
We know fast, legal, and ethical ways to build business credit. You will probably hear about some less than ethical ways to build business credit. Experts say shelf corporations won’t work.
Don’t fall for these scams! If you’re going to spend the money, why not just build business credit correctly?