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Building Business Credit Using Shelf Corporations
I received this question recently:
I have found your website over the internet and I might have understood that you could help me out. I have a few questions regarding aged shelf corporations and credit building process. I am a non-US based resident and I would like to purchase a shelf corp from the USA of two or three years old and then build credit for it.
Would you be so kind and explain to me how does that work and if I am a non-US based resident, could my corporation receive unsecured loans and credit lines? Do I need SSN in order to receive unsecured loans and credit lines?
How does the credit building process work and up to how much period does it take to be done properly? Can I reach a Paydex score of 80 or Fico score of 700-800?
There are a few things that you need to know about building business credit. The very first question I would ask you is what type of business do you have or want to have, and what you hope to accomplish by establishing corporate credit? Trying to build business credit before you have a business is a bit like putting up a website before you have a business. That said, I do think it makes sense for entrepreneurs to begin the credit building process in the early stages of their ventures, rather than waiting until they’re in a growth stage and desperate for a loan.
Let’s start with the foundation. Before you can start building business credit, you will want to make sure you establish the proper business structure. According to my colleague, small-business attorney Garrett Sutton, you cannot to be a shareholder in an S Corporation unless you are a US citizen or resident alien paying taxes in the US. That doesn’t sound like it applies in your case, so you will either have to establish an LLC or a C Corp. Garrett always encourages his clients to choose a business structure that is appropriate for the type of business they are trying to conduct, and I would agree. Don’t choose a business structure just because that’s what “everyone else is doing.” It is important to talk with an expert who can help you choose the right structure to match your goals for your business.
As to your question about a shelf corporation, that simply refers to a corporation that has been formed and “put on a shelf” so to speak. Just as it’s hard to establish a strong personal credit rating when you are just starting out and all your credit references are new, it can be hard to establish business credit and financing for a firm that hasn’t been around long, no matter how good the product or service is. Brand-new companies are considered the most risky, and that’s where the shelf corporation can come in.
There is a risk with purchasing shelf corporations, however. The risk is that you could purchase a whole set of problems when you buy a shelf corporation. If the corporation actually engaged in business, you could find yourself taking on taxes or debt that the company incurred. In addition to having a clean track record, the shelf corporation should have kept current on state corporate filings, if required, and should have filed tax returns each year, even if the amount on those returns was zero.
It iss also important to understand that purchasing a shelf corporation does not guarantee you any kind of loan. You’ll still have to build business credit, though the process may move more quickly this way.
In my next column, I’ll tackle your next set of questions.
Gerri Detweiler’s mission is to provide reliable, unbiased answers to your credit questions. She is the co-author of Business Credit Success: Get on the Financing Fast Track and serves as Personal Finance Advisor for Credit.com.
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