Buyer Beware of Shell Companies and Aged Shelf Corporations

Posted on Aug 16, 2011

We recently have become aware of companies aggressively selling so-called “shell companies” or “aged shelf corporations” on the Internet and want to warn our clients and referral sources to be aware of our concerns about using them to form a business.

An aged entity may come with existing and contingent liabilities with respect to the conduct of its business since inception. These would include everything from unpaid accounts payable to unpaid taxes and even environmental liability. Additionally, to the extent that distributions are made to the shareholders without making reasonable provision for the satisfaction of corporate obligations, the shareholders may be personally liable for the amount of such distributions. There is also the possibility that third parties might have an interest in the corporation in the form of outstanding shares, options or warrants which would dilute the ownership of the persons “acquiring” a shelf corporation.

We’ve read email advertisements that try to create a sense of urgency about acquiring these corporations. They say the structures are “available at an incredible wholesale price of only $1,999.”

The claims go on: “These aged corps come completely Credit-Ready (their emphasis, not ours) and with over $3,900 of Free Extras so that you can immediately launch a new business, buy & finance real estate, obtain fast corporate credit up to $100,000, transfer assets you want to protect into it, bid on large contracts that require minimum time in business.”

The idea that the corporation they sell you has been around for a while, so it has sufficient history to qualify for government programs that require an entity to have been operating for a specific period of time, is unlikely to pass muster. First, our firm doesn’t believe in trying to take advantage of these kinds of technicalities. Second, our experience is the government has anticipated and is prepared to deal with them. For instance, the 8A contracting program for women and disadvantaged minorities, among others, has regulations that essentially say: “You understand the spirit of what we’re trying to do here. If you do anything that is contrary to that spirit, regardless of whether it would otherwise fit within the guidelines we’ve published, we’ll deny your application or, if we’ve already accepted it, kick you out of the program.”

There are no shortcuts to creating a proper business entity with the correct tax structure, properly considered operating agreements or bylaws for your situation and in a lot of instances it can be accomplished for a comparable sum as advertised by these companies. When it comes to shell and shelf corporations, our advice is “buyer beware.”