Essentially, a shelf corporation is formed like any other corporation, and what differentiates it from the function of a normal corporation is how it is used. Whereas a normal corporation, when legally incorporated, becomes active based on the business’ normal activity, a shelf corporation, when formed, stays inactive.
Instead of being used for typical business activity, the corporation is metaphorically “put on a shelf to age” until it is needed or wanted (much like a vintage bottle of wine). And a shelf company is usually sold to entrepreneurs who wish to start a company without going through all the procedures of creating a new one.
Age and experience can definitely make a difference in the business world.
From attracting investors to attracting consumers to purchase products or services, people are far more willing to trust a company that has legally been in business for a substantial amount of time.
Ask any owner of a start-up business – it is next to impossible to obtain credit for the business without risking your own personal credit. While obtaining credit is never guaranteed, many traditional funding entities (aka not crowdfunding) look more favourably on an established corporation that already has several years’ experience.
Some jurisdictions, valuing credibility and experience, will only allow companies of a certain age to bid on contracts.
While forming a basic corporation can be quickly and inexpensively done in minutes online, there are often many subtle variations and nuances depending on the business itself which can make the formation process very costly. Foregoing this process, many companies, if they incorporate at a later date, face the risk of losing years of experience on their date of incorporation. By using a shelf corporation, they can incorporate when it is most cost-effective, yet still retain their full business experience.
Of course, shelf corporations are not a silver bullet in the corporate world – nothing is. Simply buying a corporation to add “age” to your business won’t necessarily buy you respect, especially if your product/services are sub-par. Moreover, depending upon the credit agency, once discovering that the corporation is under new management, the age and rating for your company could be reassessed (meaning no value from the additional corporate age). Still, as with any other business tool, when used for the correct purpose in the correct situation, adding age to your business’ experience via a shelf corporation can be beneficial.
And keep in mind that shelf corporations should not be confused with shell corporations that have no assets or operations of their own.