What is a Shelf Company? Advantages, Disadvantages & Costs.

At Moola Financial Group we pride ourselves on helping borderless company entrepreneurs navigate the complex world of international business structuring and offshore tax planning. One of the questions we often get asked in our offshore tax planning course is “what is a shelf company”. In today’s blog post we’ll answer that question.


Shelf company

A shelf company (not be confused with a shell company) is a company that is originally created to metaphorically sit on a shelf and “mature” or “age” over time. Once created, a shelf company generally engages in no real business activity. The specialized firms who set up shelf companies simply administer the required paper work each year as the company ages (Nil tax returns, yearly business renewal  etc). Maturity is the main value that’s added to these inactive companies over time.  Shelf companies are like wines. In theory, the older a company, the more valuable (or at least more costly) that shelf company will be. Newer shelf companies can sell for as little as $100, while older companies often cost $5000 and up. 

Why would someone want to buy a shelf company?

Public perception: The aging of a company can serve a few purposes. First, a company that can claim longevity might look better in the eyes of the public. for example, if you have a new idea for a new company, but you’re concerned about a lower level of public trust due to the young age of your company, a shelf company would give you a company “off the shelf” with a longer history behind it. Business owners could splash claims such on their website and business cards such “We’ve been in business since 1982”. Similarly, some business owners looking for investments feel that a longer business history makes their company look better to investors. 

Public perception reality: The reality is that both the public and investors are generally pretty savvy when it comes to spotting a suspicious claims. For the modern consumer and investor, age generally matters less than genuine trust. Modern day shoppers would generally like to shop and do business with a company they don’t think is being deceitful. Investors are generally looking for the same thing. Trickery is generally not an intelligent way to build customer or investor trust. In the age of social media, people who feel deceived or believe your company is dishonest, could damage company’s reputation online. Shelf company shortcuts can quickly backfire.

Access to credit: Shelf company vendors often claim that their shelf companies will earn the company owners access to faster and easier credit.

Access to credit reality: Credit issuers engage in thorough due diligence when considering a corporate credit application. They consider a wide assortment of variables that will impact their decision to issue credit (or not issue credit). While they do consider the length of time someone has been in business, the lending institution generally focuses on not specifically on the length of time, but what has happened within that length of time to make a corporation credit worthy.

Banks and lenders will often ask for 6 months of bank statements, they may ask for year end tax documents, they will want to see if you have vendor credit anywhere, and they will often run credit checks to view the payment history for any corporate accounts you hold (phone, internet etc). Having an empty shelf company with history, but without any real activity, generally isn’t often enough to qualify you for credit.

The history of a company is only important in that it provides the company with an opportunity to earn trust and gain credit. A dormant company that is 20 years old, is likely not going to secure a loan any easier than a company that is only 2 weeks old.

Lending companies will also generally look at any change of ownership of a company. Therefore, if your shelf company was only recently changed into your ownership, you’ll likely not qualify for credit based on nothing more than the age of your shelf company. 

Establishing good corporate credit is important. Corporate credit can help you lower insurance premiums and get access to better interest rates. Credit will also help you get approved for leases you may require to run your business (equipment, office space etc). Good credit can also help you secure more favorable terms with your company’s vendors. And last but not least, corporate credit helps you separate your personal finances from your business finances and helps you de-risk your personal holdings by keeping everything relating to your business separate. Good corporate credit is of paramount importance, but rarely will a shelf company help you establish that creditworthiness.

Speed of incorporation: Another reason people buy shelf companies is due to the perceived speed of company ownership. Now entrepreneurs can buy shelf companies without having to go through the process of setting them up themselves.

Speed of incorporation reality: However, the reality is that setting up a company in most jurisdictions doesn’t take very long. In most developed Western countries you can setup a company within an hour. You can often even do so online. Therefore shelf companies provide very little, if any, benefit with regards to incorporation speed.

What is a shelf company

Risk

As we mentioned previously, shelf corporations are generally created to sit on a shelf and age. However, some shelf corporations have been active in the past. While this is not necessarily a negative attribute, it does increase your exposure to risk. Buying a used company, means you’re also buying any liens or liabilities that company current has against it. And it’s not just liabilities you need to check for. You also need to check for other issues which could impact your company such as a bad reputation or historical hostile actions against the corporation. For these reasons, in-depth due diligence needs to be undertaken to ensure a shelf company is clear of any liens or liabilities.

Conclusion

For many small business entrepreneurs the risks of shelf companies don’t outweigh the rewards. That’s not to say that there aren’t specific use cases for shelf companies, but generally speaking, starting fresh with a new company provides you with everything you need to get started in the world of business.

 

 

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(*Learn how to dramatically reduce your corporate taxes by using the various restructuring blueprints that we’ll provide you in our FREE offshore tax planning and training mini-course.)

Access Our FREE Quick Start Offshore Tax Planning & Training

(*Learn how to dramatically reduce your corporate taxes by using the various restructuring blueprints that we’ll provide you in our FREE offshore tax planning and training mini-course.)

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