Shell Corporations: A Quick Way to Improve Your Business Credit?

Starting a business carries a fundamental paradox with it - In order to get credit, you already have to credit. And that's the one thing (among several others) that you lack.

But then a friend has just told you about a wonderful option. It's called a shell corporation. And it just might offer you not only the credit, but the attention of some decent-sized investors that could certainly help your cash flow.

You're hesitant, because you don't know quite enough about it. Several critical questions run through your mind. Just where do you find a shell corporation? And, now that you really think about it, this whole thing sounds almost too good to be true. Is it?

Let me clue you in on the process of shell corporations and something called a "reverse merger." A shell corporation is a business structure that has already gone through all the requirements of incorporation, but it's basically "empty inside." By that I mean it has no employees, no stock holders, no business of any kind. To look at it on paper, however, is a different view. It usually has a relatively old corporation date and that gives it a history.

You buy the shell for its "history" and its corporation date. And you have a name and a corporation that may attract some interested investors that may never have looked at your younger, "inexperienced" firm. And in the process, you may even be able to get a head start on corporate credit with this new firm.

On the surface, it certainly sounds like a good idea. But consider this whole situation again. If there is no activity inside the shell of this newly purchased corporation, then it really doesn't possess an active corporate credit history, now does it? In fact, in all probably it has no corporate credit history at all. So you really have to think about how far this purchase will get you.

In addition, the shell corporation has been used by larger firms in ways that gives it a bad reputation. So before you decide, think twice, because you may be buying yourself more troubles than you currently have now.

What no one is telling you is that your shell corporation may contain a hidden history. And as the new legal owner, you would be responsible for all debts - and legal problems - past, and present. It could be that lurking in the dark recesses of the corporate history are some liabilities, either in the form of monetary debt or pending legal action. You bought the shell, you bought the problems.

But, there is one other aspect of shell corporations that should make you at least hesitate to purchase a shell corporation. It's called the reverse merger. And it can be used to help companies - or it can be used to circumvent some serious problems.

The reverse merger occurs when a smaller, privately held company purchases a larger, publicly held corporation. The private company completely takes over the company and now the larger business structure is just that, a structure or a shell. It's now void of any activity, since the smaller one has taken it over.

In some situations the reverse merger can actually be beneficial. It's a great alternative for the small, private firm to go public without undertaking the expense and complexities involved in the initial public offering (or IPO) of stock.

Indeed, theoretically speaking, this isn't such a bad idea. The reverse merger definitely increases the small firm's visibility and reputation in the investment community, suddenly availing itself to funds that would have been impossible prior to this.

Not only that, but the purchase also allows the small company a perfect opportunity to utilize the larger company's stock to make acquisitions.

So what could possible be wrong with this? Well, nothing, unless the corporation being bought has already failed - as is the case at times - and that's the very reason it's being sold. Then you're buying yourself quite a bit of trouble. It's one thing to buy a company that you know has liabilities (which you probably wouldn't do in the first place!) It's quite another to buy one with hidden problems. This could include just about anything from lawsuits to unhappy shareholders and anything in between.

Sometimes, corporations purchase shells in an attempt to avoid taxes as well. In this case, buying a shell - even if you use it for totally legal purposes - could raise red flags with the IRS and other government agencies. And do you really need this kind of attention?

Now, before you go on the web to find yourself a shell corporation to purchase, you probably should find the phone number of your attorney - and maybe that CPA of yours. This is one of those business decisions you shouldn't make on your own!