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Organizations often avoid working with newer businesses because they perceive them as risky. As a result, companies frequently face additional challenges in their early days.
However, a small business owner can purchase a shelf corporation to try and reap the benefits of being an aged company ahead of time. Here’s what you should know about these corporations, including how they work and whether or not they’re worth the cost.
What Is a Shelf Corporation and What Is Its Purpose?
Not to be confused with a shell corporation or a shell company, a shelf corporation or limited liability company (LLC) is a legal entity that the original owner intends to sell rather than use to conduct business. Vendors usually let each shelf corp sit for a while before putting it on the market.
Business owners buy them to seem more well-established or to clear time-in-business requirements. As a result, an aged shelf corporation is more valuable than a new one.
While some vendors leave their shelf corporations idle during their seasoning period, others use the time to increase their perceived legitimacy. That can help the seller demand a higher price, though it’s potentially problematic to the end-user.
For example, some vendors acquire tradelines through their corporations to build out their credit profiles before selling them. The idea is to help the eventual owners secure business financing without having to build business credit themselves.
They might also take other actions in the name of the corporations to drive up their perceived legitimacy, such as filing tax returns, opening a bank account, or acquiring an Employer Identification Number (EIN).
Regardless of what occurs during their seasoning period, buying a shelf company saves you the time and effort of forming a legal business entity from scratch. In fact, that’s usually the best reason to buy one.
Are Shelf Corporations Legal?
There’s nothing illegitimate about the premise of a shelf corporation. However, their legality depends on what the creator does with it before selling it and the way the new owner uses it afterward.
Generally, an aged corporation that sits idle while seasoning is safe to buy. If you purchase it to avoid the hassle of incorporating an entity yourself and then conduct business as usual through it, there’s little risk that anyone will protest.
However, your chances of legal issues increase when you buy a wholesale shelf corporation from a vendor who built out its business credit profile. If you use your aged entity to manipulate the credit system, you expose yourself to significant risk.
The worst-case scenario would be to default on a loan or credit card you only qualified for because of your shelf corporation’s credit history. You could find yourself facing a lawsuit for loan fraud.
Ultimately, any time you buy an aged shelf company and use it to misrepresent your business history to a third party, you increase your chances of running into problems.
Where Are Shelf Corporations Formed?
Sellers of shelf corporations don’t have to form them in any particular location, but they usually choose small business-friendly areas. For example, vendors often create shelf corporations in the following states:
Incorporation in each of these states provides multiple benefits. For example, they have favorable tax situations, lower filing fees, fewer regulations, and better protections for your personal information.
You can also purchase aged corporations in other countries. These offshore entities are associated with tax evasion and money laundering, but they’re not inherently illegal either. However, they’re often in tax havens with relaxed regulations or law enforcement.
What Are the Risks Associated With a Shelf Corporation?
Business owners can benefit from buying a clean shelf corporation in some situations, but there are also unavoidable risks involved. Here are the most significant potential downsides to be aware of before pursuing one.
They Might Land You in Legal Trouble
As discussed previously, buying a shelf corporation could cause you legal issues if you purchase an entity and use its history to deceive someone.
The most common version of this is leveraging a shelf corp’s credit history to get funding you wouldn’t qualify for otherwise. However, that’s not the only way you could end up in trouble.
For example, you might also face negative consequences if you win a contract you’re only eligible for because of your shelf corporation’s age, then fail to complete the job correctly.
Ultimately, any time you benefit from someone’s confidence in your business that only exists because of your shelf corporation, you’re taking a risk.
They Might Not Work
Buying an aged shelf corporation and using it to pose as a seasoned business can get you in trouble, but that assumes you’ll be successful in your deception.
In reality, there’s no guarantee that you’ll be able to fool anyone. It’s not terribly difficult for most third parties to discover that you’re trying to use a shelf corporation to manipulate the system.
Many organizations also have systems to prevent people from using the strategy. For example, Bank of America requires you to have at least two years in business under existing ownership to qualify for financing.
They Might Not Have a Clean History
When you buy a shelf corporation, your vendor usually guarantees you’re getting a company that’s never been in business before. It should have no assets or liabilities, but that’s not always the case.
If you buy a shelf corporation from a fraudulent vendor, you could end up getting a company with preexisting liabilities, a history of illicit activities, or ongoing lawsuits. In these cases, you’ll be responsible for resolving your shelf corporation’s issues.
As a result, it’s essential that you do your due diligence on both the vendor and your prospective shelf corporation if you want to buy one.
How Much Do They Cost?
Shelf corps can cost anywhere from several hundred to many thousands of dollars. However, most companies sell for somewhere between $500 and $10,000.
For example, if you look at the list of shelf corporations available for purchase from Wyoming Corporate Services in 2022, you’ll find that they range from $645 to $6,995.
As you can tell from the list, the cost of a shelf corporation can vary significantly. The price you pay depends primarily on the company’s age and the extent of its credit file. Older companies with extensive credit histories generally cost the most.
In some cases, it may be worth purchasing a shelf corporation to bypass the time and effort of forming a new legal entity. However, buying a shelf corporation to manipulate the credit system isn’t a good choice.
Here are some alternative ways you can build business credit as a new company without the risk of upsetting the credit bureaus or getting into legal trouble.
Companies need vendor tradelines to build an excellent business credit rating. Fortunately, you can get one from Nav that’s bundled with several attractive benefits.
Nav provides a wide range of credit-related services for businesses, including a credit monitoring subscription. Think of Credit Karma or Credit Sesame but for companies rather than consumers.
The third tier of their business service costs $39.99 per month, but Nav reports your monthly payment history to the major commercial credit bureaus, including Experian, Equifax, and D&B.
In addition, Nav grants you access to your personal and business credit reports and scores, access to their financing marketplace, identity theft protection services, lost wallet replacement, and more.
Credit Strong Business
CreditStrong Business provides a great installment financial tradeline option to round out your credit profile. They specialize in credit builder loans and are the only company to offer the product to businesses.
A credit builder loan is a little like an installment version of a secured credit card. Once you sign up, Credit Strong puts your loan proceeds in a locked savings account.
Next, you make monthly payments that they report to the major credit bureaus, improving your payment history. Once you pay off the principal balance, they release your loan proceeds to you.
Alternatively, you can cancel your account during the life of the loan without penalty and get back the principal portion of the payments you’ve made to date.
Because they keep your principal balance as collateral, Credit Strong doesn’t even have to check your credit score when you sign up. All you need to qualify is three months in business, an EIN, and a legal entity structure other than a sole proprietorship. If you need to build a business credit history, do it right. Open a healthy mix of vendor and financial tradelines like the ones above, supplement them with net 30 accounts, and use them all responsibly. It takes more time and effort, but it’s well worth it.
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Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.