What Is A Shelf Company?
A Shelf Company (not a shell company) is a company that is already formed but is not in use. It is “sitting on a shelf” ready to be bought by a new owner.
Why Would Someone Buy A Shelf Company?
There are two main reasons why someone would purchase a shelf company. The first reason is to make an S Corporation election in a previous period. The second reason is to show corporate longevity to a third party. I’ll discuss both below in greater detail.
S Corporation Election
A Limited Liability Company (LLC), Corporation, and certain types of Partnerships can make an S Corporation Election (or S Corp Election). Sole Proprietors and Self Employed Individuals cannot.
If you created a legal entity (either an LLC or Corporation) midway through the year, your S Corporation effective date cannot predate the entity creation date. This means you’re subject to Self Employment taxes for this prior part of the year.
If you didn’t have a lot of profit for this part of the year then it’s probably not a big deal. But, if you did have a lot of profit, you’ll be taxed an additional rate of around fifteen percent (15%) on top of your normal income tax rate. This could be thousands of dollars. Purchasing an already formed shelf company allows you to make the S Corporation election back to January 1st and thus allows you to lower your taxes.
Here are some of the benefits of having longer corporate longevity:
- Many lending institutions require businesses to be established for at least two years before considering their application for credit.
- Companies with longer corporate longevity may qualify for lower interest rates on loans.
- Many real estate agreements require a business to be established for a few years before being able to purchase real estate.
- Most government contracts require a certain amount of corporate longevity to even apply for a contract.
- Some customers do not want to do business with start-ups.
Our Shelf Companies at Robert E. Clark, LLC
All of our shelf companies have never been used. This is very important because when you purchase a company, you also purchase their past history and liabilities. Our shelf companies have no financial or legal obligations and have never been used by anyone else. Please call us at 1-305-363-5429 for more details or use our convenient online form.