Shelf Corporations: The Purpose and Risks
Building business credit is incredibly important for new companies because it impacts your ability to obtain financing, favorable loan terms, and low-interest rates.
Rather than building credit organically, some business owners try to cut corners by buying a shelf corporation (also known as a shelf company).
In this post, we’ll discuss the fundamentals of shelf corporations, along with the risks, legalities, costs, and more. As we’ll explore later, shelf corporations are risky, potentially fraudulent, and not a recommended practice for building business credit.
We’ll show you a better business credit alternative. It’s one that adds aged business tradelines quickly for a low cost, and it’s 100% legal.
What is the Purpose of a Shelf Corporation?
The reason for buying a shelf corporation is to obtain a business credit history without building it from scratch.
By purchasing an aged corporation that has had time to mature, it makes it easier to apply for business lines of credit or other business financing.
Even if a shelf corporation hasn’t had any business activity or any real assets, the time it’s spent “on the shelf,” makes it appear more well-established, which is an integral part of getting funding and other business services.
And as FundsNet points out, “Most states require that your company be in business for a specific period of time before applying for contracts or government contract bidding.”
In short, an aged shelf corporation has more perceived value than a brand-new one, which makes a business look more credible. It also gives it more leverage for securing business financing, all while bypassing the heavy lifting that comes with building business credit.
Risks of Using a Shelf Corporation
At first glance, buying a shelf corporation may seem enticing. But there are some serious drawbacks to be aware of.
For starters, you’ll have to spend a considerable amount of money to purchase a shelf company.
The exact costs can vary. (As we’ll discuss in more detail later, it’s thousands of dollars.) But regardless of the vendor you go through, a shelf corp is going to be a significant expense.
If you’re a new business owner just trying to get established, this can be a hindrance to company formation and make it harder to gain financial momentum.
In most cases, whenever you buy a shelf company, it won’t have any assets or liabilities.
But this isn’t always the case.
While uncommon, there have been instances where a business owner buys a shelf corporation from a fraudulent vendor where the company has a history of unlawful activities, liabilities, and lawsuits.
If you happen to buy an aged corporation with a history like this, there is no asset protection, and it’s your responsibility to resolve the issues. So if there’s negative history attached to a company, it can open a can of worms that you don’t want to deal with.
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