Shelf Corporation

[Savoir Faire-Demogague in NJ]

Have any of you guys out there heard of a Shelf Corporation?

My genius son, phoned me this afternoon and asked me about it. I have vaguely heard of this type of entity. I quickly looked it up on Google, and a few articles/sites came up all indicating the reason why one would acquire one. And this is the reason why he is looking into it.

I recommended against it, and said he should research it and get legal advice...

Anyone???

[TD2K]

That's a new one. I've heard of a shell corporation but not a shelf one.

www.businessweek.com/smallbiz/content/jul2009/sb20090714_626511.htm

Interesting.

[robbase]

is it a company with handy men that come to your house to install shelves on your walls?

[Savoir Faire-Demogague in NJ]

Here are a couple of links on it. One from Wikipedia, the other an article in Business week that is a criticism of it:

en.wikipedia.org/wiki/Shelf_corporation

www.businessweek.com/smallbiz/content/jul2009/sb20090714_626511.htm

[8 Bit WWBG]

It sounds like the equivalent of a bare bones PC. You buy an already assembled skeleton, but still get to shape the important parts.

[daylight]

I can only speak for my "jurisdiction", which is in Europe, and probably entirely out of question for him. It takes an 1 hour to register an LLC with the court of registration and company documentation can be prepared and signed within 1-2 hours, depending on how specific the client's needs are. Since the transfer of shares/quota also has legal costs, I'd totally advise against it...you can pay the same amount of money for the setting-up of a company. But...I'm not in the US, so my answer may be totally off...just thought that I'd throw this in as a piece of interest for legal minded people.

[hoops902]

It's not really about the time to set up anymore, it's about having an "established" company which has been around for a while and therefore more credit worthy than a startup. It's a way to try to trick lenders into financing your endeavor based on a "false" business history (I say false, but it's not falsified records, it's just making your business look as if it's been around longer by using someone else's company history as your own essentially).

Basically think of walking into a bank and saying "I'd like a line of credit for my company, we've been in business for 10 years" and saying "we've been in business for 10 days". While I think it's less than promising to actually work given that the shelf company likely has little in the way of real credit and only age on it's side, it's probably not worth the time and effort to deal with as opposed to just setting up your own company and finding financing. I don't think banks are quite so in the habit of tossing around money to uninvestigated companies/individuals as they used to be.

ETA: Everything I've seen about them as we studied them a bit in my MBA program seemed to be "Good in theory, probably unsuccessful in practice, lots of room for legal issues in transferring ownership and the representation of what your company actually is when looking for financing." Overall seemed to be that it's best for those selling the company who essentially just incorporate, wait, and try to profit from people who aren't willing to do the legwork and looking for a potential quick fix.

If it were really that great of an idea wouldn't we all just form our own corporations immediately "just in case"? It's not hard to see through if the financier is paying any attention at all...which they seem to be doing more of lately.

[Deleted]

Why does your son want to get a Shelf Corporation?

It sounds like it's strictly for the purposes of obtaining credit. If that's the case, it'd be pretty worthless before or after the credit bubble.

I used to work in small business lending and loans to small businesses or mid-sized businesses virtually always require a personal guarantee. So it's not like you can just have a 10 year old company just walk into a bank and get a loan. The first thing they'll ask for is your last 2 years financial statements AND your personal financial statement.

Sounds like a waste of time.

[Savoir Faire-Demogague in NJ]

Yes, it is to have access to a corporate credit line. To long to explain why.
While on the phone with him, I googled it and came up with the two links in my 3rd post. Based on the articles in those posts, I suggested against it, but added that he should do some research and get legal advice, then make his own decision.

[Deleted]

Why is he looking for a corporate credit line? Is it related to the business he plans on running?

I'd tell him not to waste his time. No bank/credit union will lend money to a company without financial statements showing they can repay out of cash flow....plus a personal guarantee.

[Savoir Faire-Demogague in NJ]

Why is he looking for a corporate credit line? Is it related to the business he plans on running?

It is related to the business he owns and runs. He started the enterprise in 2005.

I'd tell him not to waste his time. No bank/credit union will lend money to a company without financial statements showing they can repay out of cash flow....plus a personal guarantee.

I cannot vouch for financial statements and the like, but I am guessing his tax returns have all the data and numbers. He has plenty of cash flow.

[tt00]

Yes I've heard of it. To be honest its depends on what you are trying to accomplish . It would be good if you are wanting to get into gov't contracts quickly and for corporate credit lines. A shelf company with an established FEIN, DNB number and Paydex score may give you access to unsecured credit with vendors without having to go through a long waiting period ( not sure how this has been affected since the credit crash /crunch)

Is he trying to build corporate credit for his business? He has to make sure he establishes Duns and Bradstreet record for this business and open lines of accounts to build a business credit file history (Shelf Corporation allowed someone to skip over this as it was already done )


Go here for info

creditboards.com/forums/index.php?showtopic=446965

creditboards.com/forums/index.php?showforum=27

[Deleted]

Feb 8, 2011 17:27:08 GMT -5 Savoir Faire-Demogague in NJ said:

I'd tell him not to waste his time. No bank/credit union will lend money to a company without financial statements showing they can repay out of cash flow....plus a personal guarantee.

I cannot vouch for financial statements and the like, but I am guessing his tax returns have all the data and numbers. He has plenty of cash flow.

Oh, it sounds like he just wants to incorporate then? Which is what he should do if he business is making money.

When you report your business income on an individual tax return, you pay income taxes and FICA taxes on all your profits.

If you incorporated, as an S-Corp, you can avoid paying FICA on a certain portion of your profits. If he's making money, it pays for itself in no time. Plus it allows you to build credit in the corps name and protect himself.

I was under the impression from your post that he had no business and just wanted to form a corporation to take out a loan or something.

[Savoir Faire-Demogague in NJ]

His "company" is incorporated. When he started it, my understanding from speaking with him is that he personally put up all the cash, and used personal credit to get things moving.

The less I know about what my kids are doing, the better off I am...LOL

Thanks for the responses. I am sure I will hear more about this, I'll post if I do.

[brdsl]

If it is for a new fleet, I am jealous.

[hoops902]

Feb 9, 2011 11:09:26 GMT -5 Savoir Faire-Demogague in NJ said:

His "company" is incorporated. When he started it, my understanding from speaking with him is that he personally put up all the cash, and used personal credit to get things moving.

The less I know about what my kids are doing, the better off I am...LOL

Thanks for the responses. I am sure I will hear more about this, I'll post if I do.

Lol, the more I hear, the less I understand why he'd need a shelf corp. He's already incorporated and has been in business for several years. He's already accomplished the things that would advantage him from using a shelf corp unless I'm missing some kind of twist.

The 2 advantages are that it's already incorporated for you and it's got a corporate life of several years. If he simply needs an influx of cash into his current corporation I don't think buying a shelf corp and "merging" (I assume that's what he'd be trying to do with his company and the shelf) isn't likely to do much more good than simply seeking corporate credit via his own company.

Interesting idea though, can't say I've heard of someone with a current incorporated entity of several years going out and trying to get a shelf corp. My instinct would be that it's even riskier as he's exposing his current profitable company to more legal risk than if he were just starting a new company with no assets by bringing in another corporation. Sounds like more in legal research than he'd likely benefit from the credi tline.

[Savoir Faire-Demogague in NJ]

Lol, the more I hear, the less I understand why he'd need a shelf corp. He's already incorporated and has been in business for several years. He's already accomplished the things that would advantage him from using a shelf corp unless I'm missing some kind of twist.

You may have missed my previous post. The corp has no established credit. He has put major financial transactions on his personal credit cards.

[hoops902]

Feb 10, 2011 9:44:37 GMT -5 Savoir Faire-Demogague in NJ said:

Lol, the more I hear, the less I understand why he'd need a shelf corp. He's already incorporated and has been in business for several years. He's already accomplished the things that would advantage him from using a shelf corp unless I'm missing some kind of twist.

You may have missed my previous post. The corp has no established credit. He has put major financial transactions on his personal credit cards.

I saw it, I might just be missing something in my thought process though. I haven't seen many shelf corps that have much in the way of established credit. Most wouldn't carry the kind of available credit that would make it useful to purchase the shelf corp if you had a business which had been running for 5 years and presumably was having success. If he's been profitable I would imagine it would be easier to get corporate credit based on his actual business than some kind of defunct ghost company which may or may not get by creditors at the realization of what is actually being done with it.

The situation I could see it being needed is if he needed a very large cash outlay for a big expansion...I just havent' seen many shelf corps with that kind of actual available credit. Most lenders seem to realize nothing is going on with the business and close down credit lines when the credit available is of that size.

Either way, he needs to be extra careful with the fact that he's got a current business going. He probably doesn't have much on the line if he's got nothing to start with and gets a company that has some kind of hidden issues, but you'd hate to see him put his current business at stake when trying to bring in another company for it's credit. It just seems not worth the potential trouble and the cost of making sure everything works out legally speaking for the amounts of credit I've seen available on shelf corps before. I haven't exactly seen a high number though so maybe there are more out there with really large credit lines than I think there are.

[Savoir Faire-Demogague in NJ]

Yeah, I got all that Hoops. Not talking a multi-million dollar enterprise here. Maybe a $300,000 in annual revenues. It is a service oriented business.

I appreciate your replies and analysis.