When entrepreneurs seek to acquire a company to operate their business, they often hear from their registration agent that they can either set up a new company from scratch or purchase a “shelf” or “off-the-shelf” company. In this simple guide, we will explore what a shelf company is, its benefits, disadvantages, the buying process, and when it is the best choice for your business.
What is a Shelf Company?
A Shelf Company is an entity or business that was legally pre-registered by someone—typically by a lawyer or a registration agent—and has never conducted any trade or transactions. The entrepreneur purchases this company and can quickly start trading once they fulfill the legal requirements for ownership transfer.
Unlike setting up a new company from scratch, a shelf company eliminates the time-consuming registration process. These companies are also known as “shelf corporations” or “off-the-shelf companies.
How Are Shelf Companies Formed?
Typically, shelf companies are formed by lawyers and business agents with the sole purpose of selling them, without ever engaging in trading or business activities. The formation process is straightforward and exact as for a registered company.
Shelf companies are formed in the following steps:
- The lawyer or corporate service provider registers the company with the relevant government authority. This includes choosing a company name that doesn’t exist in the industry or geographically, defining business structure, and filing required paperwork.
- The company must meet the basic compliance requirements to ensure its legitimacy. This includes the minimum required number of directors and shareholders’ appointments — those are commonly employees of that agent. Additionally, it includes registering the business address (agent address) and securing a tax identification number.
- The agent ensures the assignment of the Standard Industrial Classification (SIC) code, which defines the type of business. Commonly, these codes are 74990 (non-trading company), 99999 (dormant company), or 82990 (other business support service activities).
- The agent creates a shelf company with a simple share structure, commonly, it has a single ordinary share.
- The shelf company should have implemented a standard ‘model’ Articles of Association, a predefined template provided by regulators. These establish some basic rules for the internal management and operations of the company.
- Some agents set up corporate bank accounts with shelf companies, but the accounts remain inactive until the entrepreneur takes ownership.
- Once the company has formed, it remains inactive “on the shelf” until someone buys it “off the shelf” and takes ownership. This may take a couple of months or years to get sold; till then, the agent will be responsible for maintaining the company’s compliance and legal requirements.
The ownership of the shelf company will be transferred through legal documentation with important changes on purchasing by an entrepreneur.
Is a Shelf Company Right for Entrepreneurs?
The right choice between buying a shelf company or registering a new company depends on the business structure. An entrepreneur must be aware of their business and the best-suited business structure for that.
Here are some business structures with their choices:
Sole Proprietorship: In this business structure, the owner and the company are legally the same entity. Thus, the owner is personally responsible for all debts and obligations of his business. Forming a new company is appropriate for this structure due to its simplicity and direct control.
Partnership: A partnership-based business involves two or more individuals sharing the ownership and management responsibilities of the company. Similar to sole proprietorships, partnerships are relatively straightforward to establish. Forming a new company would be more beneficial than spending money on buying a shelf company.
Limited Liability Company (LLC): An LLC structure combines the elements of both partnerships and corporations. It offers limited liability protection to its owners while allowing flexible management structures. Entrepreneurs might consider a shelf company to quickly form and present a well-established business history.
Corporation: Business in this structure is a separate legal entity that also provides limited liability protection. For establishing a corporation, you will have to go though complex procedures and regulatory compliance. By purchasing a shelf company, you can skip these procedures.
Advantages of Buying a Shelf Company
- Immediate Business Operations: Buying a shelf company allows entrepreneurs to quickly commence their business operations by bypassing the time-consuming registration process. This can be particularly beneficial when seizing timely market opportunities or fulfilling urgent client demands.
- Enhanced Credibility: An old, pre-registered company may project an image of longevity and stability and then of acquiring a new company. This can potentially boost confidence among clients, suppliers, and financial institutions. This perceived reliability can facilitate business relationships and access to credit.
- Access to Contracts and Financing: For certain opportunities, such as government tenders and financial assistance, a minimum business operational period is required. Owning a shelf company with an earlier incorporation date can meet these criteria, enabling the owner to benefit from such opportunities.
- Reduced Administrative Burden: Purchasing a pre-registered company can be beneficial for entrepreneurs to avoid the legal complexities and paperwork. This allows them to focus more on core business activities.
Disadvantages of Buying a Shelf Company
- Higher Costs: Shelf companies with older entities fall in the premium category and demand higher prices. This additional expense may be difficult to afford, especially when modern incorporation processes have become more streamlined and cost-effective.
- Hidden Debts: Even if you’re told the company is free from past issues, some shelf companies might have unpaid debts or legal problems. It’s important to thoroughly check the company’s history to ensure there are no hidden surprises that could cause trouble for you later.
- Difficult to Tailor: Shelf companies come pre-formed and might not match your specific business needs or branding. Changing things like the company name, structure, or internal rules can require extra paperwork and costs.
- Extra Scrutiny: Authorities and banks might be cautious about shelf companies because they’ve sometimes been used improperly. This could mean more questions and challenges when you’re trying to open bank accounts or get financing.
How to Buy an Off-the-Shelf Company?
As a purchaser, the first step for an entrepreneur to buy a shelf company should be to find a trustworthy shelf company provider. Must ensure that the company has no prior trading history or liabilities. When reviewing the companies to choose, consider a few important factors like company age and jurisdiction, to find one that matches your business requirements. Perform thorough due diligence to confirm that the company isn’t involved in any fraudulent or illegal activities and is compliant with regulators.
Then, finally initiate with the registration agent for transferring the company’s ownership. The agent will ask for the necessary documentation to transfer all company shares to you. Appoint new directors and make sure the existing directors have resigned. Make essential changes like business address, contact information, and company name if desired to reflect your brand.
When you get the ownership, inform the appropriate government agencies about the new ownership, directorship, and company details to meet compliance requirements.
Why Do We Suggest Setting Up a New Company?
Establishing a new business today can often be accomplished within a few hours. Registering a new company is more efficient and secure than purchasing a shelf company. When forming a new company, you have the flexibility to choose an appropriate company name, business address, and appoint shareholders, directors, and corporate secretaries.
Additionally, registering a new business ensures compliance with current laws and regulations, proactively preventing unexpected liabilities or outdated management structures. Since only startup fees apply, forming a new company is cost-effective, avoiding the purchase and transfer costs associated with shelf companies.
