When Buying a Shelf Corporation Doesn't Pay

Nossaman Partner Ron Grace was quoted in the BusinessWeek article "When Buying a Shelf Corporation Doesn't Pay." Mr. Grace, a member of the Firm's Corporate Practice Group, said that one of the historical reasons for purchasing a shelf corporation was to gain access to credit, since banks considering loans favor companies with corporate longevity. 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, he continued.

But he advised 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, he said.

Mr. Grace also noted that 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," he said. "The safer bet is to start a new corporation."