According to the regulations by MASB, a company is categorized as a Dormant Company for a particular financial year if not involved in any business activities or set no account transactions during the same period.
We shall start by defining the term ‘dormant’. According to the Cambridge dictionary, dormant means that something is currently inactive and does not grow or sleep but it might be active later on.
Why do companies go dormant?
How do people choose to leave a dormant company, and why does anyone bother leaving it dormant if he or she is aware of its condition? To begin with, a dormant company does not experience any significant change but it remains inactive. In terms of the question on why people do not shut down such firms, it is the potential costs involved in closing company. For a company to be closed down, some costs may have to be incurred. Alternatively, it is also costly to remain in a dormant status that demands shareholder audits purposes of application for audit exemptions and annual return submissions.
Since keeping a dormant company open has monetary consequences similar to those of shutting down it, an individual might wonder why entrepreneurs choose to maintain their companies active. The basis for this decision is the fact that some of the entrepreneurs open businesses with a view to sell them as shelf companies.
What is a shelf company?
A shelf company, also known as a shell or aged company, is a legal body created which has not been conducting business operations and transactions. Basically, the company is in a dormant state waiting on the shelf for either disposal or future use.
Usually, these firms are formed by business formation agencies and sold to entrepreneurs or investors who want to begin a new project or enlarge their already operating businesses. The entrepreneur or investor is able to save both costs and time that would have been incurred in starting a new company from scratch when he acquires the shelf company. In addition, they are able to start working immediately with the name and registration of the already existing company.
Why get a shelf company?
From the perspective of material value, there are three main benefits from purchasing a shelf company these advantages include credibility and credit score as well as time saving.
A shelf company normally has an adequate standing within its own industry or marketplace which help create a new organization look plausible and valid. This reputation is often complemented by a stronger credit history, which makes it easier to borrow money from banks. Moreover, entrepreneurs who choose to buy shelf companies can save much time and cost especially if compared with the process of setting a new company.
Nevertheless, it is important to note that buying a shelf company comes with some risks. The company may be secretly burdened with bad reputation or legal debts that the young entrepreneur could as well inherit. Therefore, it is highly advisable that businessmen should make thorough due diligence before buying such an entity. This due diligence could include the scrutiny of the company’s financial and legal track record, background checks on its main personnel, consulting with legal and financial experts.
Dormant Company vs Shelf Company
Dormant companies and shelf companies are similar in that they are both legally registered companies that are not currently conducting any business. However, there are some key differences between the two:
Shelf companies are specifically formed with the intention of being sold to someone who wants to start a new business. They are typically pre-registered with a generic name and standard articles of association. This means that the buyer can quickly and easily get started with their new business without having to go through the entire incorporation process.
Dormant companies, on the other hand, are companies that have been formed but have never actually traded. This could be because the business idea never got off the ground, or because the company is simply not active at the moment. Dormant companies can still be used for a variety of purposes, such as holding assets or intellectual property.
Dormant companies are not always shelf companies, but shelf companies are always dormant companies. In other words, all shelf companies are dormant, but not all dormant companies are shelf companies.
Here is a table that summarizes the key differences between dormant companies and shelf companies:
|Can be used for a variety of purposes
|Specifically formed to be sold
|Can be formed by the owner or through a company formation agent
|Typically formed by a company formation agent
|Can be any age
|Usually newly formed
|Can have any name
|Typically has a generic name
|Articles of association
|Can have any articles of association
|Typically has standard articles of association
Therefore, it is highly recommended that business owners perform thorough due diligence prior to making any purchase. This encompasses reviewing the company’s financial and legal records, conducting background checks on key personnel, and seeking advice from legal and financial experts. Reach out to FastLane Group for expert guidance and support throughout the process.