What is a Shelf Company?

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. However, registering a company is now a lot faster and more cost-effective than purchasing and changing a shelf company. As a result, shelf companies are very rapidly becoming a thing of the past. This article explains what shelf companies are, how they work and why shelf companies 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 proverbial ‘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 standard constitution. Therefore, following their purchase, the purchaser also needs to make any necessary changes to the constitution.

For many, a key benefit of acquiring a shelf company was saving time. Purchasing a shelf company, rather than setting up a new 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 acquired older shelf companies with the view that an older company is more attractive to potential clients. These clients include customers, banks, business partners or investors. The appearance of having a corporate history would therefore lend the company greater credibility. Further, they may take the stance that an older company also has more credibility and can bid on contracts in jurisdictions that require companies to be in business for a certain length of time.

Incorporating a New Company

Today, it is much simpler and faster to incorporate a new company. It is, therefore, more common for someone to register a new company rather than acquiring 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 secretary of the company.

Upon registration, many new companies have a standard constitution. However, there is nothing preventing you from creating a tailored constitution. Keep in mind that providers of company registration services are likely to charge extra to change their standard constitution.

Additionally, it is less expensive to set up a new company because you only have to pay the setup costs. If you buy a shelf company, you have to pay for both the company and costs to transfer the company to you. For these reasons, the shelf company registration business has substantially slowed down.

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Key Takeaways

Shelf companies are companies that have never conducted businesses 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. Nowadays, however, registering a new company is relatively fast and even cost-effective in comparison to acquiring a shelf company. This is because incorporating a new company allows you to choose important features such as its name, registered office, shareholders, types of shares, and directors/secretary. By contrast, you would have to change shelf companies’ details to suit your needs, which can actually become an administrative burden. As a result, shelf companies are now less common as company registration becomes a streamlined process.

If you have any questions or need assistance registering a new company, get in touch with LegalVision’s business lawyers on 1300 544 755.

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