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The Truth About Shelf Corporations

December 13, 2012

 

Forget everything you have read or been told about Shelf Corporations. The majority of it is probably dead wrong. I have heard and seen it all when it comes to shelf corporations and even after seeing people get screwed out of money in the hopes of some magical short cut to business funding, people still seem to buy into the hope that there is a way to use a shelf corporation alone to receive funding.

 

Lets first talk about what a true shelf corporation is. A Shelf Corporation is a company that was created years ago for the sole purpose of being sold in the future simply for the value of its age. A person forms a company (usually in a state like Montana or Wyoming where the filing fees are inexpensive) and puts it on a “shelf”. They do nothing with the corporation other than file the annual reports and cover the annual fees. Once the corporation is a few years old it has a sort of value for the right person.

 

The only value in an aged shelf corporation is for someone doing one of 2 things: Looking for state/government contracts that require a company to be in business for a certain amount of years before applying or someone looking to make their company appear older for funding purposes. However here is where the confusion comes in. An aged corporation alone WILL NOT GET YOU FUNDING! You will probably qualify for a business cell phone plan with no deposit, but that is about all the credit you will get from a shelf corporation alone.

 

I will explain how you CAN use an aged shelf corporation to obtain business credit but first lets take a look at the scams you will find when searching for a shelf corporation:

 

The most common pitch you will hear is that a company can sell you a shelf corporation that already has business credit attached to it. The amounts will be very appealing usually starting at $500k and going up to as much as $10MM, and they typically charge $10-20k for the corporations. The idea is that a profitable company obtained all of this credit in the companies name and now they are willing to sell that corporation (not the company) and the credit will transfer with the corporation to you the new owner. In theory this sounds like a great idea. There are only a few problems, the first being that credit is non-transferable. This would be the equivalent of Bill Gates obtaining a $12M mortgage on a house and then just signing it over to you. It just cant happen. The bank that extended the credit to Bill Gates gave it to him based on his credit and his net worth, they don’t even know who you are let alone your ability to repay a $12M loan. This is an example people can understand and probably laugh about, but the same applies to the business credit. The lender underwrote that business and its principals, they did not underwrite you and whatever business you are planning on running under this corporate name so the credit can not transfer to you. Simple as that.

 

The other major problem and always obvious sign of fraud aside from the fact that they will never disclose the company information or credit information in detail is that they will only accept a wire transfer as payment. The reason for this is it is as good as cash. Once the transfer is made you cant get your money back and you cant dispute the charge like you can a credit card payment. If you want to really test the legitimacy of the company you are working with, ask them if you can place the money in an attorney escrow account until the transfer is made and you verify the existing credit. I guarantee you will never hear back from them again.

 

The other thing you have to watch out for is buying corporations that were actual companies in the past and not just a Shelf Corporation. The reason for this is if you purchase the corporation, you are now the owner and responsible for anything bad that may have happened with that company since the day it was incorporated. Back taxes, financial audits, lawsuits, judgments, you get the point.

 

If you do find that a shelf corporation is the right choice for you, make sure that you purchase a corporation that has NO history. No tax ID number, never operated as a business and never filed taxes. By doing that you are ensuring that there is nothing that can come back to haunt you and since it has never been registered with the IRS yet, you will technically be the first owner.

 

Now lets talk about the only way to legitimately obtain credit using an aged shelf corporation. Lenders in today’s economy are taking no risks which means in order to lend to a business they need several things:

  • An officer of the company that will personally guarantee the funds

  • The officer must have a personal credit score over 700

  • Low debt utilization on revolving personal credit

  • Multiple aged revolving accounts with high credit limits on personal credit

  • A company that is at least 2 years old

You need all of these things to obtain funding, not just one or two of them, but all of them. The corporation alone will do you no good what so ever, unless you have those other things.

 

To recap- if you are a start up and are looking for business credit that wont appear on your personal credit this can be achieved but, you or an officer of your company will have to have great personal credit and then you can purchase a shelf corporation to get past the 2 year requirement that most lenders require. I know everyone is always looking for a shortcut or a “secret” way to obtain funding but if you really sit back and think about it, those shortcuts never seem to make sense. If all it took was having a company that is a couple years old to get large credit lines without having to personally guarantee or even personally qualify for the credit, I would be writing this blog from an island somewhere because lets face it, I have no shortage of company names I can come up with and I could be taking out excessive amounts of credit and have no reason to ever pay it back.  But that is not reality.  

 

 

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