Archive for April, 2011

Shelf Corporations

Friday, April 22nd, 2011

I was driving home yesterday and listened to a show on the French CBC called “Classe économique”.  They had an interesting report about some serious problems with Quebec’s electronic system for incorporating companies.  They said that there is currently a backlog of at least one month, and if you had something wrong in your application for registration that it could take upwards of a second month before your company was registered.  This is starting to create problems for business people in Quebec because until the company is registered, the business cannot really do anything – it cannot open a bank account, it cannot transact business (unless done by the person him/herself and then the contract is transferred to the company after it is incorporated and the business person crosses his/her fingers that nothing goes wrong in the meantime), etc.

How can business people get around this problem?  One relatively easy solution is a “shelf corporation”.  This, of course, begs the question of what exactly is a shelf corporation.  As its name implies, a shelf corporation is a corporation that “sits on the shelf”.  In other words, it is a company that is incorporated and then not used but saved for a later day.  Why are they created?  Numerous reasons.  Sometimes they are created just to have a company handy should one be needed right away.  Sometimes they are created with a view towards specific events – for example, about 10 years ago there was a strike at the Ontario government and while the strike was looming lawyers started to incorporate shelf corporations so that they could use those corporations for clients’ needs if the strike occurred and turned out to be long.  (Today, though, since it is now easier to incorporate federally, there probably wouldn’t be the same rush since the lawyers would just give their clients federal companies.)  I also had a shelf corporation where the client came from England, wanted to incorporate (which I did for him), then ran into difficulties and decided to abandon the incorporation and left me with a company that never did anything and for which the incorporation was effected but the company was never organized (that is, no shares were issued, no officers appointed, no resolutions passed or by-laws enacted).  I kept the company as a shelf company for use by a later client should the need arise.

Why would you want to use a shelf corporation?  As in the CBC report – when you need fast(er) access to a company.  This would be not only where there are problems with the incorporation process but also where you have a wonderful, but urgent, deal and want to use a separate company but don’t have time to incorporate.  Beyond this, though, there could be several reasons.  One is that you may need to be “grandfathered”.  Sometimes the rules will change.  And, again, sometimes the rule change will permit grandfathering.  For example, whatever applicable rule we’re dealing with will say that the new rule came into effect on January 1, 2011.  If you incorporate a company today then your company will be subject to the new rule.  However, if you use a shelf corporation that was incorporated before January 1, 2011, then that corporation may be subject to grandfathering – that is, the “old rule” still applies to that company.  For example, this could apply to the ever-changing tax rules or possibly for licensing rules.

Another potential benefit comes from the age of a corporation.  For example, putting on advertising “Bob’s Fishmart Ltd. – Incorporated 2011” doesn’t mean much.  But if you pick up a shelf corporation that is, say, 5 years old, then that advertising might have a little more punch.  Similarly, you may have some better credibility with others (bankers, potential customers, etc.) if they see that your company is older – or possibly some contracts (such as government procurement) may require only businesses with a minimum age can submit bids on the contract.  Of course, though, this isn’t the “be all and end all” because, for example, while the banker might be pleased to see that the company has been around for 5 years, this won’t be too big a deal when he/she asks to see the financial statements for the last 5 years and sees nothing but zeros since the company hasn’t done anything.

In any event, at least now you know about shelf corporations and depending on your circumstances, it might be beneficial for you to start your business with a shelf corporation instead of incorporating a new company.

Something to think about.