Introduction
You have decided that you need a business entity. You know that the wait time in your state is two or more weeks (or perhaps longer). You've never formed one before, so if it's rejected, it will take another two or more weeks. But you need the entity ASAP. What do you do?
One option is to purchase a shelf company from someone who already owns an entity (such as an LLC or sometimes a corporation). But what does that mean? How do you find one? What are the pros and cons?
What is a "shelf company"?
A shelf company is a business entity that has already been formed. It already exists, so you don’t have to go through the formation process. You’re buying an existing entity that is just “sitting on the shelf.” Sometimes they won't even have an EIN (essentially, they will have no financial history).
Why have one?
There are two primary benefits benefits to purchasing a shelf company rather than forming a new entity. First, the entity is available right away (no need to wait on the Secretary of State to approve it). In California, processing times are two to three weeks. In Texas, processing times are two to three weeks online, and two to three months by mail. So if you are pressed for time, spending extra money on a shelf company might make sense.
Second, the entity is old relative to one you would form (a potential creditor, investor, or consumer will see that your entity was established years ago rather than this year). It gives the appearance of longevity and perhaps commercial history (even though there typically is none). You'll want to be careful here though. If there is a formal business age requirement (for example, by a general contractor or government entity for bidding on projects), this could be an area of potential liability.
How do I get a shelf company?
There are many services that provide shelf companies. A simple search online will result in thousands of sites. Many attorneys even maintain shelf companies for eventual sale. You will want to make sure that the entity does actually exist, and that you are buying from the existing owner.
What are the downsides?
This will vary from state to state. But one big problem is the possibility of unseen or unknown liabilities. Some entities operated prior to distributing assets and then choose to exist solely as a shelf company. These shelf companies will be older (and thus more valuable), but they do bring with them the threat of potential unknown liabilities. And bear in mind that "age" does not automatically translate into "credit."
They are expensive compared to other companies. You are paying for the convenience of having it ready to go, and in some cases, you're paying for the age of the company as well.
You may have to amend your articles or certificate right away, and this can take time (this is usually ameliorated by the trend of having basic or fairly non-industry-specific names for the entities).
You also won't be able to find them for some states. For example, California requires an $800.00 per year minimum tax on certain entities, including LLCs and corporations. It is expensive just to have an entity, even if it isn't doing any business. This makes little sense, and it's the reason that you mostly only see shelf companies in states like Texas, Wyoming, or Nevada.
Any other issues I should know about?
There may also be other issues that arise related to securities regulations and taxation. For example, California is not a popular jurisdiction for shelf entities due, in no small part, to California $800.00 minimum annual franchise tax: every LLC, corporation, LP, etc. organized in California, even if it has no business activity, pays a minimum of $800.00 annually.
One final issue is the Corporate Transparency Act. It appears that the CTA does not require reporting for shelf companies (older than a year, not engaged in active business, not owned by a non-US resident). But this may well change in the future.
Is it the same as a "shell" company?
No. Shell companies are those that have no business operations or significant assets by design and by purpose. That might be true of a shelf company until purchased. This distinction is subtle, but the point is that shelf companies are intended to be taken off the shelf, while shell companies are meant more as a shield to its owners.
Conclusion
Shelf companies can be a useful tool to get your business up and running smoothly, quickly, and with at least some perceived longevity. However, they may raise other issues outweighing their perceived benefits. Take the time to learn more about them before purchasing one.
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