Don't Be Tempted by 'Shelf Corporations'

With revenues down and debt financing tougher to get than ever, it's not a stretch to imagine entrepreneurs being tempted toward desperate measures. One of those avenues could involve a vehicle called a "shelf corporation"—a corporation formed in a low-tax, low-regulation state expressly to be sold off for its pristine credit rating. Historically shelf corporations were considered a legitimate way to streamline a startup, but this attempt to sell them as vehicles to get around credit guidelines is fairly new, according to Nick Harycki, CEO of Swift Financial, a Wilmington (Del.) financial services company dedicated to small business banking. Doug Broten, president of the BBB of Central California, recently investigated a purveyor of shelf corporations and concluded that they are clearly unethical, and possibly illegal. He spoke with Smart Answers columnist Karen E. Klein about why small business owners should steer clear. Edited excerpts of their conversation follow.I've heard of a "shell corporation" but what's a "shelf corporation"?

We explain on our Web site that a shell corporation is a business entity with no significant assets or ongoing business activities. A shelf corporation is a shell corporation that is formed and then held on to—put on a shelf—for a few years while some credit history is established for it. The idea is that it will eventually be sold to someone who wants to start a company without going through the steps to create a new one, or someone who wants to get a bank loan but can't qualify because his or her own company doesn't have the necessary credit scores or business history.How is a credit history established for an empty company?