As a small business owner, it’s smart to look for ways to help your company get ahead. However, there’s a difference between trying to get ahead and looking for shortcuts. Shelf corporations often, though not always, fall into the latter category.
Shelf companies are formed for the purpose of being sold off, after an excellent business credit rating has been established. There’s just one problem. If you purchase a shelf corporation and use it to access business financing, like credit lines or loans, you might be guilty of committing fraud.
What Is a Shelf Corporation?
A shelf corporation, also known as a “shelf company” or “aged corporation”, is a corporation that’s formed and then “put on a shelf” where it will age for several years. The company doesn’t engage in real business and often has no real assets. But, its owners may establish business tradelines to create a corporate credit profile and score through the business credit bureaus.
Shelf corporations often come with employer identification numbers (EINs) from the IRS. A shelf corp might also feature several years worth of filed tax returns and even a business bank account with a real financial institution. These steps are taken in an effort to make the company appear legitimate and well established in the eyes of others.
The reason a shelf corp is often formed in the first place is with the goal of flipping it down the road to someone. The buyer is usually someone who’s willing to pay for the value of the shelf corporation’s credit rating and age.
Where are Shelf Corporations Formed?
Shelf corporations can be formed in many states throughout the US. However, they’re often formed in states with either low taxes, low filing fees, low regulations, or some combination of the three.
Some of the most common states where shelf corporations are formed include:
How Much Do Shelf Corporations Cost?
The prices charged for shelf corporations vary widely, depending on the age of the corporation and the company that is selling it. Companies with established credit profiles may demand higher prices as well.
Younger shelf corporations might sell for around $650. Meanwhile, the price for some “aged corporations” have been reported to climb as high as $10,000.
What Is the Purpose of a Shelf Company?
Aged shelf companies can be appealing for a number of reasons. Potential buyers of these types of corporations might include:
- People who want access to commercial credit, like loans and credit lines, without taking the time to establish a business credit profile the normal way.
- People who want to avoid a personal guarantee for business financing.
- People who want to save time by skipping the paperwork and purchasing an established corporation instead.
- People who want the ability to bid on contracts since some require a certain length of business history before bidding is allowed.
To appeal to these potential buyers, companies that sell shelf corporations may advertise their “stock” of companies using click-bait terms such as:
- Credit-Ready Corporations
- Aged Corporations and LLCs
- Aged Shelf Companies
- Aged Tradelines
- Seasoned Tradelines
Nav’s Gerri Detweiler issues a “buyer beware” warning if you’re considering the purchase of an aged corporation. Detweiler explains that she’s spoken to consumers who have lost money on such programs. “Some are outright fraud,” Detweiler warns, “and others don’t provide the benefits the buyer thought they were getting.”
Nav CEO Levi King also cautions against the purchase of shelf companies with seasoned tradelines because, “it’s usually shady.”
There may be some legitimate reasons to buy a shelf corporation. However, buying a company with aged tradelines in an attempt to manipulate the commercial credit reporting and scoring system isn’t legitimate.
Are Shelf Corporations Legal?
Shelf corporations often reside in a very gray area, legally speaking. Whether or not a shelf corporation is ultimately considered legal or illegal comes down to two important factors. It all depends upon how a shelf LLC is created and how it is used.
If you buy a shelf corporation with a seasoned credit profile and use that credit to secure a loan you wouldn’t have been able to qualify for normally, you may be crossing the line. This is especially true if you take on debts that you ultimately fail to pay as agreed. Do this, and there’s an argument to be made that you’ve committed loan fraud (and perhaps other crimes).
Of course, whether or not you’re found guilty would ultimately depend on a few things — (a) whether you’re prosecuted and (b) what a judge rules in your case. However, that’s a pretty big risk to take. It’s also a risk you can easily avoid by not purchasing a shelf corporation and simply building your business credit the right way.
Experian states that off-the-shelf companies were formerly used to streamline new business startups. “However, selling [shelf companies] as a way to get around credit guidelines is new, making them unethical and possibly illegal.”
They Might Not Work
Plans to use shelf corporations as a way to quickly access business credit don’t always work out. For example, you might purchase a shelf corporation that isn’t in good standing with lenders and has a poor business credit profile. Another potential hiccup in your plan could occur if the business credit bureaus or lenders sniff out a shelf corporation scheme when you apply for business financing.
If a business credit bureau gets wind that a company is suddenly reporting new officers and it looks like a shelf corporation ploy, the age of your company might be reset to 0 on your business credit profile. Lenders might deny your application for credit or shut down existing lines of credit if they become suspicious that you’re trying to manipulate the system as well.
Shelf Company vs. Shell Company
Another type of business setup that’s prone to abuse is the shell company. While a shelf company and a shell company may have similar sounding titles, they don’t work the same way.
A shell company is a business that’s established to hold money for an individual or another business entity. It’s another type of corporation or limited liability company which is often without active business operations. Typically, though not always, a shell company is an offshore corporation formed outside of the United States.
Shell companies may be used to hide business ownership from the IRS, state tax bodies, law enforcement, and the public. When abused, shell companies may be used as a means to illegally evade taxes or even prosecution.
The Department of the Treasury Financial Crimes Enforcement Network says that shell companies are commonly used for financial fraud, including money laundering, credit card fraud, and false or over invoicing.
Like shelf corps, there are some legitimate uses for shelf companies.
- Some corporations may use shell companies to protect trade secrets from their competitors, like sensitive product development or an upcoming business takeover.
- Public figures may use shell companies to make their home harder for the public to find. (Stalkers are a real concern, after all.)
- Corporations who operate both inside the U.S. and abroad may establish shell corporations to comply with international laws or to take advantage of looser tax laws.
Using a shell company to try to get out of tax obligations, however, isn’t a legitimate use. At best, it’s shady. At worst, it’s tax evasion and fraud.
How to Establish Business Credit the Right Way
Good business credit can open doors and make obtaining financing easier for your company. It can help you keep your business and personal credit separate. Solid commercial credit can even increase the value of your company and make it more attractive to investors.
Ready to establish business credit for your company? Check out this 8-step plan from Nav and learn how you can hit the ground running.
It’s also wise to keep a close eye on your business and personal credit. Doing so can help you monitor your business credit building progress and allow you to make sure the information on your reports is accurate. A free Nav account lets you check your business and personal credit side by side.
Remember, it’s smart to want a strong credit profile for your small business. It’s just never a good idea to take shortcuts and try to game the system. Take the time to build your business credit the right way and your hard work will almost certainly pay off in the end.