Shelf Companies and UK Company Formation: A Balanced Overview

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If you have heard of the terms “shelf company” or “ready-made company” but have never quite understood what they meant then this article is for you. Here we will provide you with a balanced overview of shelf companies and ready-made companies in the UK, why they are used, why they are not always the best option, the due diligence that you should carry out, the regulatory issues and why – ultimately – it may be better to register a new company.

1. What Are Shelf Companies and Ready-Made Companies?

A shelf company is a limited company that has been registered with and incorporated by Companies House but has never traded. Such a company is known also as a “ready-made”, “off the shelf”, or “aged” company.

In the context of shelf companies it is important to understand the difference between a “tailor-made” company and a “ready-made” company. As a potential company owner you may either incorporate a new company with Companies House or else purchase a ready-made shelf company. By registering a new company you can tailor your registration documents to your exact business needs. A shelf company, on the other hand, will tend instead to have been registered using standard provisions. 

2. The Speed of Registering a New UK Limited Company

Another aspect to consider when deciding whether to purchase a shelf company is the speed of registering a new UK limited company. Shelf companies were popular when it used to take several weeks to register a new limited company with Companies House due to the reliance on paper forms. For this reason, many business people felt that it was better to purchase an already-registered shelf company. 

Today, using the online application process, the speed of registering a new UK limited company is far quicker. Online applications are normally processed within 8 hours (potentially on the same day), while postal submissions only take between 8 and 10 days. 

3. Questionable Legitimacy: The Grey Area of Shelf Companies in the UK

Purchasing a shelf company is not without risks and, hence, is not necessarily the best route to company ownership. One of the main reasons why purchasing a shelf company may not be the best choice is that the company may have a questionable background. Some shelf companies may have a history of:

  • Illegal activity
  • Large financial losses
  • Fraudulent activity
  • Hidden liabilities
  • Non-payment of taxes and other debts
  • Legal challenges and lawsuits.

Without a clear history of the shelf company and its previous usage there is a real risk that your business may be negatively affected legally, financially, and in terms of its reputation. This is why due diligence is so important when purchasing a shelf company.  

4. Due Diligence: Knowing What You Are Getting Into

While it may seem tempting for some business people simply to purchase a ready-made limited company without carrying out rigorous due diligence, serious problems can occur. Before buying an off-the-shelf company it is essential to check the following:

  • Whether the company has ever traded.
  • Whether there are any undisclosed costs (e.g. debts or liabilities) – See the section “Hidden Costs of Shelf Companies”, below, for more information.
  • Have the company’s accounts, VAT, PAYE and corporation tax records reviewed by an accountant (if any exist).
  • If there are any outstanding legal matters which may result in a claim against the company in the future.

Because in most cases shelf companies have never traded, there should – in theory – be no liabilities, debts or legal issues. This, however, must never be assumed. Although a shelf company may be offered for sale with no obvious adverse history, the onus is on you to check that it has a completely clean history and that there is no risk to your business. 

5. Hidden Costs of Shelf Companies

If you are considering purchasing a shelf company in the UK then it is important to understand the hidden costs that you may inherit. Even if the seller of a shelf company has not disclosed any outstanding financial liabilities, this is no guarantee that you will not find yourself exposed to hidden costs. When acquiring a ready-made company there may be outstanding fees, fines, debts or other inherited liabilities.

6. Banking and Financial Implications

Further factors to bear in mind when purchasing a shelf company are the banking and financial implications. When applying for a new business bank account the bank may refuse your application if they detect any adverse history when they carry out their own due diligence, anti-money laundering and credit checks. Even if they do allow you to open an account they may later decline to offer you credit and loan facilities if they have concerns regarding the financial history of the company. 

7. Legal and Compliance Issues

When purchasing a shelf company, remember that the memorandum of association and articles of association will not be drafted to meet the specific needs of your business. It will most likely have been incorporated using Model Articles of Association under the Companies (Model Articles) Regulations 2008. There are three different versions of the model articles for the following company types:

  • Private companies limited by shares
  • Private companies limited by guarantee and 
  • Public companies

Even if the standard model articles meet your needs, it is therefore still important to check which version was used when the company was registered. For example, if you require a company limited by shares but the shelf company is limited by guarantee then this may pose a problem. If your memorandum of association and articles of association are not drafted correctly then your limited company may not be compliant with the Companies Act 2006. 

8. Why Forming a New Company is Often the Better Choice

If you are contemplating buying an off-the-shelf company in the UK then, having read all of the above, you may now be wondering: “Given the risks of buying a shelf company, why not just start with a clean slate?”. The reality is that, in nearly all situations, forming a brand new company is the better route to company ownership than a shelf company. For all of the reasons outlined above, newly formed limited companies provide complete peace of mind because you will avoid the following:

  • Legal and compliance problems related to your company’s constitutional documents, because these will be correct and meet your exact requirements from the outset. Furthermore, you can be confident that there will be no legal challenges against your company arising from historical matters before you owned it.
  • Refusal of banking facilities and loans due to the history of the company.
  • Outstanding liabilities and costs that were not disclosed to you by the seller or agent.

9. Our Commitment to Ethical and Speedy Company Formation

By entrusting Uniwide Formations to handle all aspects of your new limited company formation, you can be assured that the process will be:

  • Completed quickly: – We can even offer a same-day company registration service.
  • Completed in accordance with your business needs: – We will ensure that your constitutional documents correctly match your company type and needs.
  • Thoroughly vetted: – We carry out thorough checks at each stage of the company registration process to ensure that it proceeds smoothly and without any unnecessary delay.

Furthermore, we will support you through the company formation process, answering all of your questions and providing expert advice. After your limited company has been incorporated we then offer a wide range of additional business services to make the administration and compliance of your company as easy as possible for you while you then run your business venture.

10. The Right Path to Company Formation in the UK

By now you will understand why, despite the (long outdated) illusion of speed and convenience that was once attached to them, shelf companies are not offered by our company and why potential business owners should consider other, better options. Ultimately, we believe that starting and setting up your business as a company should be risk free. You have enough to do while setting up a new business without being hit by unexpected legal, accounting and financial problems due to the undisclosed history of a shelf company. By forming a brand new company you have a clean slate on which to base and build your business, completely unencumbered by problems from the past caused by others.  

Conclusion

Shelf companies in the UK are – or used to be – typically sold on the basis of two main benefits: Cost and speed. The reality today, however, is that it is now far cheaper and even quicker to set up a new limited company rather than go through the process of finding and buying a shelf company. Furthermore, considering the various risks of a shelf company having an adverse history that has not been fully disclosed to you by the seller or formation agent, there is really no upside to buying a “shelf” or “ready-made” company. Even after the strictest due diligence, a problem could still arise which may cost your business financially, legally, in terms of its reputation or even all three of these. While there may once have been arguments for the benefits of shelf companies in the past, none of these arguments any longer apply today. With Uniwide Formations by your side you can relax in the knowledge that we will handle all aspects of registering and incorporating your new, clean slate company within one working day; all from as little as £14.99.

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