The Dangers Of Using Shelf Companies When Targeting To Invest Offshore

The decision to grow your business to the international level is an impressive one. Your enterprise will be only a step away from operating at the coveted global level. Whether you are an e-commerce enterprise or a mobile app developer, taking your business abroad is a great decision.

To achieve this coveted global status, you will need the right business formation. In many cases, investors prefer the route that is less intensive. But the results of such shortcuts rarely end well.

One of these shortcuts that look very impressive is buying a shelf company. This post demonstrates why you should stay away from shelf companies and instead register a new offshore company.

What exactly is a shelf company?

Shelf companies are firms registered with the intention of selling to other investors. But why would one contemplate of buying a shelf company in the first place?

Because the companies are already registered, the investors are made to believe that transferring ownership is simpler than starting to process a lot of documents for new registration. For example, a person who has a business deal that went through faster than expected might want to buy an existing company and use it to complete the transaction.

In many cases, people who are less conversant with the legal procedures of registering a new company abroad might want to evade the process by simply buying an existing company. The argument is that the company is like a bus that is already on the road. Therefore, a new investor will simply drive on.

Do not be deceived by these seemingly attractive benefits because they rarely get realized. Instead, you should also carefully check on the following dangers that could ultimately result in huge losses.

The company was created with different structures

When the shelf company was created, those who created the Articles of Association and Memorandum of Understanding among other documents did not have you in mind. Therefore, your business is likely to take the structure that is available as opposed to what is ideal for it.

If the shelf company used a complex structure such as many departments, your enterprise would be required to use them and shoulder the burden of associated costs. These are costs that could be avoided if you registered a new firm.

You can only take the name that is available

Though there are procedures that can be used to change the name of the company, the process is very long in many jurisdictions. Therefore, you will be forced to immediately adopt the registered name even if it does not match well with the company/ brand.

It is almost impossible to open a bank account

Though other aspects such as ownership and name of a shelf company can be changed, things become very difficult when it comes to the bank account details. Many banks will simply decline to open a bank account without giving reasons for it.

At this point, you will be left with a company that cannot transact. Without a bank account, buyers cannot pay, and accounting becomes very difficult. Now, many jurisdictions are also discouraging selling of shelf companies indicating they are associated with fraud.

While shelf companies might appear like the easier option for moving abroad, they rarely end well. You are likely to either end up with a company that cannot trade, legal case, or a serious loss. To avoid incurring such losses, the better option is to register a new company.