Stay Away From Shelf Corporations

You’ve probably heard of a “shell corporation” but maybe not a “shelf corporation.” A shell corporation is a company without assets or actual business activities. A shelf corporation is a shell corporation that is formed then “put on a shelf” for a few years while credit history is established for it. (It’s similar to-though less ethical than-buying up domain names with the idea that you’ll sell them rather than use them.)

The corporation will then be sold to someone who wants to start a company without taking the time to establish credit on its own. When you’re a start-up, it’s nearly impossible to secure a bank loan because your company has no credit history. When you buy one of these corporations, what you’re actually buying is the ability to get bank loans and credit regardless of your actual ability to repay such loans or credit.

A shelf corporation establishes credit history by the owner setting up multiple companies and billing among them all, thereby establishing a system which makes it appear that each company has accounts payable and receivable, although the same money is just being moved around among the organizations. Each of them pays its accounts on time and eventually each has a stellar credit rating. So it’s a phony credit history times fifteen or twenty. The business credit agency Dun & Bradstreet requires a company to have six transactions a month from ten or fifteen creditors over a year’s time to qualify as creditworthy.

Typical shelf corporations sell for around $5,000 and advise buyers to not request more than a $150,000 bank loan, as this is the level at which banks will only check credit scores and not investigate further. You can begin to see how this set-up is unethical and in some cases outright illegal. So do yourself a favor and take the time to let your company establish credit history and ratings naturally, over time and through sound, ethical business practices.

Stay Away From Shelf Corporations