BBB — Shelf corporation could be trouble for business
While businesses find it increasingly difficult to qualify for loans and lines of credits, small business owners are resorting to applying for loans from behind the facade of shelf corporations.
The Better Business Bureau advises small business owners that, as tempting as these sound, using a shelf company in order to misrepresent your credit worthiness to a bank could be considered loan fraud.
The term "shell company" generally refers to a limited liability company and other business entity with no significant assets or ongoing business activities.
The term "shelf company" refers to a shell company that is created and maintains little or no activity, or put on the "shelf" to season. The shelf company can then be sold to someone wishing to start a company without going through steps to create a new one.
What’s a shelf company?
Companies that create and sell shelf corporations often recommend to the buyer that they will be able to use the credit worthiness and business history of the shelf company to obtain credit for their business. The companies also recommend that buyers can exploit the age of the shelf company to get government contracts, which usually have requirements for how long the company has been in business.
While the scheme may be tempting to small business owners who are strapped for cash, the possible outcomes outweigh the potential benefit.
Many banks are growing more stringent when handing out loans and could see through the ruse and deny the loan; which means that the small business owner wasted thousands of dollars on the scheme.
Also, the bank will likely require a personal guarantee and since the scheme doesn’t actually increase the business’ creditworthiness, the bank could come after the owner’s personal assets if he or she defaults on the loan. In the worst case scenario, the small business owner could be found guilty of loan fraud, face the penalties and be required to pay the money back.
BBB Tips, provided by the Minnesota Better Business Bureau, runs Fridays in the Post-Bulletin. For information, call the BBB at 1-800-646-6222 or go to Postbulletin.com/weblinks.
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