In Short
- Definition: A shelf company is a pre-registered company that has never conducted business, holding no assets or liabilities.
- Historical Use: Previously, shelf companies allowed for immediate business operations without the delays of new company registration.
- Current Relevance: With streamlined registration processes, shelf companies are now less common and often less practical.
Tips for Businesses
Given the ease and cost-effectiveness of modern company registration, consider establishing a new company tailored to your specific needs rather than purchasing a shelf company. This approach ensures compliance with current regulations and alignment with your business objectives.
A shelf company is a company that is already registered but has never traded or conducted business and holds no assets or liabilities. Essentially, the company is registered to sit on a ‘shelf’, waiting for someone to buy it. Buying a shelf company used to be the best way to quickly acquire a company without going through the time-consuming procedure of registering a new one. This article explains what shelf companies are, how they work, and why they are progressively becoming less common.
The History of Shelf Companies
Previously, the process of registering a company took a considerable amount of time and effort. Many people could not wait for their company registration and required a company as soon as possible for an immediate start. Therefore, solicitors, accountants and specialist company formation services would keep a stock of companies waiting on the ‘shelf’, ready for purchase as a pre-registered company. People refer to these as ‘shelf companies’ (or ‘shelf corporations’).
Purchasing Shelf Companies
When a client purchases a shelf company, providers of the shelf company may need to make changes to the company, which can include:
- transferring the shelf company’s shares to the nominated purchaser;
- changing the registered address of the company to a new address that the purchaser chooses;
- changing the current directors to the new directors that the purchaser appoints (the process requires the existing directors to resign); and
- changing the name of the company to a name the purchaser chooses.
Shelf companies were typically registered with a market standard constitution. Therefore, the purchaser must also make any necessary changes to the constitution to suit their business, general needs and preferences.
Purchasing a shelf company allowed many to:
- start their business immediately;
- gain fast access to third-party equity and corporate debt financing (for example, from investors and banks); and
- be available to bid or enter into contracts faster.
Others acquire older shelf companies because they believe an older company is more attractive to potential clients. These clients include customers, banks, business partners, and/or investors. The appearance of having a corporate history would, therefore, lend the company greater credibility, such as contracts that require active companies of a specific duration.
Advantages and Disadvantages of Shelf Companies
Shelf companies in Australia offer several advantages, significant disadvantages, and legal risks that business owners should consider carefully.
Although the age of a shelf company can lend credibility, potentially making it easier to secure contracts, loans, or partnerships. Older shelf companies may have established credit histories, which could benefit financing.
However, these advantages are balanced by several disadvantages. This is because you will need to go through the process of transferring the company’s shares, changing the current directors, changing the company name and amending the company address. Therefore, it is generally easier to register the company yourself.
Additionally, shelf companies are typically more expensive than registering a new company. As there would be a company share ownership change, you may also need to consider tax considerations.
It is also essential to consider that the existing structure of the shelf company may not perfectly align with your business needs. As such, it may require additional changes and potential restructuring. This can have additional costs and further tax consequences.
Key Legal Considerations
The legal risks associated with shelf companies in Australia are significant to consider. The shelf company may have unresolved compliance issues or outstanding obligations that become the new owner’s responsibility.
Tax Liabilities
There could be unforeseen tax liabilities from the company’s past that transfer to the new owner. In Australia, regulatory bodies like ASIC may pay closer attention to shelf companies due to their potential misuse in money laundering or tax evasion schemes.
As soon as you become a director of the shelf company, you’re bound by directors’ duties under the Corporations Act 2001, and any breaches of these duties, even if they occurred before your involvement, could potentially become your responsibility.
Due Diligence
Furthermore, performing thorough due diligence on a shelf company’s history can be challenging, increasing the risk of unforeseen legal issues. The company may have existing contractual obligations that you become responsible for upon purchase.
To mitigate these risks, conducting thorough due diligence before purchasing a shelf company is crucial, seeking professional legal and financial advice, ensuring all necessary changes and updates are appropriately filed with ASIC, and maintaining strict compliance with all relevant laws and regulations post-purchase.
While shelf companies can offer certain advantages, they also come with unique risks and responsibilities that must be carefully weighed against your business needs.
Incorporating a New Company
Today, it is much simpler and faster to incorporate a new company. You can set up a company within an hour if you have the required information and advice.
It is, therefore, more common for someone to register a new company rather than acquire a shelf company. It is also much more efficient and less administratively burdensome to set up a company with specific features rather than changing features. For example, if you set up a new company, you can choose the:
- company name;
- registered office and principal place of business address details;
- shareholders;
- number and type of shares issued to each shareholder; and
- directors and corporate secretaries of the company.
Upon registration, many new companies have a standard structure and regulations. However, nothing is preventing you from creating a tailored set of rules. Keep in mind that providers of company registration services are likely to charge extra to advise on and amend their standard constitution.
Additionally, setting up a new company is less expensive because you only have to pay the setup costs. If you buy a shelf company, you must pay for the company and the costs of transferring the company to you. For these reasons, the shelf company registration business has substantially slowed down.
If you are a company director, complying with directors’ duties are core to adhering to corporate governance laws.
This guide will help you understand the directors’ duties that apply to you within the Australian corporate law framework.
Do I Need a Shelf Company?
Before purchasing a shelf company, you must understand which business structure best suits your needs and goals.
There are various business structures to choose from which include:
- Sole trader: A sole trader is a business that an individual runs. If you set up as a sole trader, the law considers you and your business to be the same rather than separate entities. As a sole trader, you do not need a shelf company;
- Partnership: A partnership is where two or more individuals form a legal ‘partnership’ and operate the business under one ABN. As a partnership, you do not need a shelf company; or
- Company: A company is a separate legal entity from its directors and shareholders. When starting your business, you may wish to purchase a shelf company; however, the setup costs will likely be lower when you register your own company from scratch.
Key Takeaways
Shelf companies are companies that have never conducted business and are available for purchase. Previously, purchasing a shelf company was a savvy business move as it saved people more time having a pre-registered company. Additionally, it was far more cost-effective than setting up a new company.
If you have any further questions regarding shelf companies, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A shelf company is a business that has been registered as a company but has never conducted business and holds no assets or liabilities. They are established for the purpose of selling registered companies onto someone else, so that they do not need to go through the process of registering a business themselves.
The process of registering a company used to be quite time-consuming, so purchasing a shelf company was the best way to acquire a registered company quickly. However, it is becoming increasingly easy for business owners to register companies themselves. This means that shelf companies are rapidly becoming redundant.
As it is getting more straightforward, faster and more cost-effective to incorporate a new company, there are fewer benefits to purchasing a shelf company. This is because you will need to go through the process of transferring the company’s shares, changing the current directors, changing the company name and amending the company address. Therefore, it is generally easier to register the company yourself.
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