I am starting a dot-com business. I plan on self-funding the first $100,000 [to pay] for development, legal, consulting, and marketing. My thought was to purchase a shelf corporation, merely to expedite the process, thinking it is a quicker and easier way to start a corporation. I have some contract proposals pending and want to sign an agreement as soon as possible. Does this make sense in my case? —P.C., Pescadero, Calif.
Let’s start with a definition: A "shelf" corporation is an incorporated entity that has had no activity but has been created and "left on the shelf."
Why would someone put a corporation in storage for weeks or months? Here are a few reasons, along with some ideas on how they may apply to your situation.
Shelf corporations historically provided a cheap and quick entryway for entrepreneurs to get their ventures up and running when time pressure was on. It might be that the entrepreneur wanted to bid on a job that specified bids come only from corporate entities. Or it could be a desire to expedite a contract agreement, as in your situation.
The thinking was that, instead of going through the process of creating a new corporation, a small business owner could purchase a shelf corporation and immediately begin hiring employees and bidding on projects.
Not as Necessary Now
This reason has really become far less compelling in recent years, however, as the time and cost of incorporating has been reduced substantially in most states. In California, the general time frame to incorporate a business is 20 days, says Nellie R. Akalp, chief executive officer of Westlake Village (Calif.)-based CorpNet, a document filing service that offers online incorporation service. "If you are able to afford to pay the California expediting fees, you can have the corporation set up within 24 hours," she adds. This schedule from the California Secretary of State’s office shows expediting fees ranging from $350 to $750.
Purchasing a shelf corporation in California might actually slow you down, since transferring ownership will require additional state filings and wait times, Akalp says.
Another historical reason for purchasing a shelf corporation was to gain access to credit, since banks considering loans favor companies with corporate longevity, says Ron Grace, a partner in the Los Angeles law firm Nossaman. If you could go to a banker and show that your shelf corporation had been established some years earlier, you might have a better chance to get a loan, Grace says.
But he advises against acquiring a shelf corporation in your situation. "In today’s credit market, banks will look into the company’s history as part of its due diligence and uncover a shelf corporation. I don’t see the same advantages of a shelf corporation for this purpose as in years past." Besides, since you are self-funding your startup, getting access to early credit may not be as crucial for you.
Also, with shelf corporations there is always a risk that you could be inheriting a poor business history. Although the corporation may be sold to you on the premise that it has had no activity in the past, it may in fact have done some business years ago and incurred bad credit or tax liability. "It would be imperative for the purchaser to conduct due diligence, which may be costly and time-consuming," Grace says. "The safer bet is to start a new corporation."
There are some darker reasons that shelf corporations are sometimes used. One is to give an appearance of longevity that doesn’t hold up. If you do that, you’ll be attracting investors and customers on false premises. Another is to hide corporate activity and avoid taxes, legal judgments, or state regulation. As a startup entrepreneur, you don’t want your new business associated with anything remotely shady, says Deborah Sweeney, CEO of MyCorporation.com, a Calabasas (Calif.) company that helps entrepreneurs incorporate. "It will be easier for you to start a new entity, with your business name of choice, rather than purchase a shelf corporation," she says.