According to the Malaysian Accounting Standards Board (MASB), if a company has had no business activity or account transactions in a financial year, it is considered a Dormant Company in that financial year.
Let’s first understand the meaning of ‘dormant’. According to the Cambridge dictionary, dormant refers to something that is asleep, not active or growing now but has the possibility to turn active in the future.
Why are companies left dormant?
What happens to a dormant company and why won’t someone just close the company instead of leaving it dormant? Well firstly, nothing happens to a dormant company – it just stays dormant. And if you’re wondering why people don’t just shut down the company, that’s because closing a company may be costly! However, on the flip side, leaving a company dormant might also cost a fortune as shareholders will still need to do an audit, apply for audit exemption, or even submit the annual return.
So, if both closing or maintaining a dormant company is costly, you might be wondering, why would entrepreneurs choose to keep their company open? That’s because some entrepreneurs incorporate a business specifically to sell their companies as a shelf company.
What the heck is a shelf company?
A shelf company, also known as a shell company or aged company, is a company that has been incorporated but has not yet conducted any business operations or transactions. The company is ‘sitting on the shelf’ waiting to be sold or used for a future purpose.
Shelf companies are typically created by business formation companies and sold to entrepreneurs or investors who are looking to start a new business or expand their existing operations. By purchasing a shelf company, the entrepreneur or investor can bypass the time and expense of creating a new company from scratch and can immediately start operating under the existing company’s name and registration.
Why would I want a shelf company?
In order of importance, the three main benefits of a shelf company are credibility, credit rating, and time savings.
A shelf company may have an established presence in its industry or market, which can provide credibility and legitimacy to the new business. This credibility also usually comes with a more reliable credit history that makes securing funds from banks easier. Finally, by purchasing a shelf company, entrepreneurs can save time and money compared to incorporating a new company.
Keep in mind that buying a shelf company carries additional risk, namely that the company may have a negative reputation or legal liabilities that are not immediately apparent, and the entrepreneur or investor may inherit these issues.
For that reason, we strongly advise business owners to carry out due diligence before making a purchase. This may include reviewing the company’s financial and legal history, conducting background checks on key personnel, and consulting with legal and financial professionals.