Updated: Jan 26, 2022
By definition, shelf corporations are companies or corporations that are created and left with no activity – literally put on the “shelf” to age – and then sold to a person or group of persons who want to start a company without going through all the usual procedures and processes. These companies are typically viewed as having no need of credit and are shunned by lenders.
Is using a shelf corporation putting you on track for a personal and professional train-wreck?
In most cases, D&B is quick to identify shelf corporations for exactly what they are — a “flash-in-the-pan” strategy to achieve credit and then dodge the responsibilities that accompany the debt. Their 180+ year history of credit management has proven time and again that these types of strategies will typically leave lenders and creditors holding the bag for the funds they have provided. It is for this reason that D&B is quick to research companies they believe are shelf corporations, downgrade their credit potential, and pull the switch in the rail yard before the lenders get taken for a disastrous ride.
There are a vast array of specialized businesses who promote their services in the shelf corporation field. They create fictitious corporations, put them on the shelf to age, and then wait for a buyer to come along who has a need for the business. Fortunately for them, their client base is exploding due to credit coaching companies who suggest their clients take this route to achieve credit success.
Oftentimes, these companies work hand-in-hand to promote and sell each other’s services, but neither will honestly advise their clients of the risk they are assuming. And while there are a number of reasons for purchasing a shelf corporation, legitimate or otherwise, all of them come under intense scrutiny. Some purchase to avoid the mass of complicated paperwork, while others purchase to bid on projects that require a business be a specific age. Many people purchase a shelf corporation for the purpose of attracting consumers or investors or to obtain corporate credit. But whatever the reason, it is generally considered an attempt to misrepresent the actions and operations of the business and is, for the most part, doomed to failure.
It is questionable whether a shelf corporation will actually improve access to capital, since creditors and investors usually research a company’s history as part of their due diligence process. If D&B or any of the other credit bureaus learn about the company being “under new management”, they will list it on their reports, effectively “re-aging” the company to the date of the new management, which defeats the whole purpose of purchasing the aged company in the first place. In order to keep the creditors and credit bureaus from figuring out the truth, a certain amount of re-invention or misrepresentation must occur, and here is where the trouble starts.
Companies who sell shelf corporations or promote their use to fraudulently obtain corporate credit simply will not reveal to the purchaser that these misrepresentations can land their clients in more personal and professional legal turmoil than they are bargaining for. The legal ramifications are clear, though. And as a business professional, you are expected to understand those ramifications.
Per US Code, Title 18, Part 1, Chapter 63, Sec. 1344 – BANK FRAUD Whoever knowingly executes, or attempts to execute, a scheme or artifice— (1) to defraud a financial institution; or (2) to obtain any of the moneys, funds, credits, assets, securities, or other property owned by, or under the custody or control of, a financial institution, by means of false or fraudulent pretenses, representations, or promises; shall be fined not more than $1,000,000 or imprisoned not more than 30 years, or both.
Even if, by some luck, purchasers of shelf corporations can successfully worm their way through the dark tunnels and manage to attain credit, it is usually short-lived and ends in heartache. Once the fraud is discovered, the authorities are quick to act. The creditors are notified, existing lines of credit are cut, the recommendations will be downgraded, the D&B report will likely be placed into a higher risk status, and the small business owner is left facing a mountain of debt, no means to recover from it, and cannot get any more credit to help them out of their dilemma.
They will oftentimes also face incredible legal battles, including lawsuits, judgments, and possible prison time because their LLC status cannot protect them from their fraudulent actions. In many cases, their own personal credit will be impacted, and all because they were not provided truthful, factual information in the beginning. By the time they realize how bad it really is, the "snake-oil" salesman will have moved on to the next victim.
Most people struggle with achieving credit simply because they do not understand how to do so in a progressive and responsible fashion. We feel you should understand the ramifications of trying to subvert the system or fraudulently reach an end goal.
We have vowed to our company, our clients, and to D&B, that we will not knowingly engage in the misrepresentation of any data. We simply will not put our clients, their companies, their futures, or those of our own company, under this type of risk. We do not work with shelf corporations. We ask the tough questions and do our due diligence. We thoroughly research each company to make sure it is an active and functioning business and require that all documentation is in order before we proceed.
LESSON: Use acceptable processes and educate yourself so you can effectively manage your business credit profile for the years to come. Keep away from companies who offer get-rich-quick strategies. If you try these types of programs, eventually you will reach the end of the track, and you will be standing there alone to face the destruction.