According to MASB regulations, a company is considered a Dormant Company for a specific financial year if it engages in no business activities or records no transactions during that period.
Defining ‘Dormant’
The Cambridge Dictionary defines ‘dormant’ as currently inactive but potentially active in the future.
Why Do Companies Go Dormant?
Enlist some of the causes of company sleep and also warrant why some owners do not close unproductive businesses. The first hardly raises an eyebrow because it is cheap compared to other treatment modalities The second, however, may be a bit puzzling.
Taking a company through some form of shut down involves incurring certain costs and even maintaining a company as a dormant form involves certain costs that a business will be in a position to meet some of which includes the annual return fees as well as the audit exemption fees. However, certain businesspersons prefer to retain their dormant company in Singapore, for they plan to dispose of them as shelf corporations.
What is a Shelf Company?
A shelf company is also known as shell or an aged company is one that was incorporated but never traded or engaged in any business endeavor. It lies idle as the old remnants until it is sold again or required at some later date to be used.
Such types of legal entities are registered by business formation agencies; they are bought by business starters or investors who may wish to begin with a new idea or add on an extra idea, in their line of business.
Purchasing a shelf company is also less expensive for the purchase more especially if the intention is to start an organization new to the market and furthermore allow the buyer to operate under one name and under one registration from the start.
Why Get a Shelf Company?
There are three main benefits to purchasing a shelf company:
- Credibility: A shelf company often has an established reputation, making the new business seem more legitimate.
- Credit Score: An older company generally has a better credit history, facilitating easier borrowing from banks.
- Time Saving: Buying a shelf company saves time compared to setting up a new one from scratch.
However, there are risks involved. A shelf company might have hidden reputational or legal issues that the new owner could inherit. Therefore, it is essential to perform thorough due hard work, including reviewing financial and legal records, conducting background checks on key personnel, and consulting with legal and financial experts.
Dormant Company vs Shelf Company
Dormant and shelf companies are both legally registered but inactive. However, key differences include:
- Purpose: Shelf companies are created to be sold, while dormant companies might be held for various purposes, such as asset or intellectual property holding.
- Formation Process: Shelf companies are typically formed by agents with standard articles of association and generic names, while dormant companies can be formed by the owner or an agent and may have any name and articles.
- Age: Dormant companies can be any age, while shelf companies are usually newly formed.
Key Differences Summary:
| Feature | Dormant
Company |
Shelf
Company |
| Purpose | Various purposes | Specifically to be sold |
| Formation Process | Owner or agent | Typically by agent |
| Age | Any age | Usually newly formed |
| Name | Any name | Typically generic |
| Articles of Association | Any articles | Typically standard |
As with any business transaction, some precautions are wise when preparing to purchase a shelf company: the most important of which is to ensure some due diligence is done. Other ways include reviewing financial and legal records, conducting a check on senior personnel in the organization, consulting with legal and financial professionals.
