Many foreigners and entrepreneurs from all fields in Saudi Arabia are always looking forward to setting up new businesses. Nevertheless, this can be a difficult and drawn-out procedure. For that and many other reasons, entrepreneurs are interested in a shelf company formation in Saudi Arabia. This choice saves investors a lot of time in comparison to opening a company from the ground up.
In this article, we will talk about basic information about shelf company formation in Saudi Arabia. By acquiring a ready-made company, entrepreneurs can save time and effort in setting up a company. In other words, they obtain an already-registered company, in which operations can be started immediately. However, shelf companies are not that known globally, so information revolving around them might be scarce.
- What exactly is a shelf company and how does it work?
- Benefits of shelf companies
- Challenges of shelf companies
- Purchasing shelf companies
- What should you look for in a shelf company if you plan to buy one?
- How can we help you with your shelf company formation in Saudi Arabia?
What exactly is a shelf company and how does it work?
As previously mentioned, shelf company formation in Saudi Arabia refers to obtaining a business that a previous owner registered but has not traded or conducted business with. Furthermore, these types of companies hold no assets or liabilities. In summary, these companies are made as if they were put on a “shelf”, waiting for entrepreneurs to buy them.
Shelf company formation in Saudi Arabia is beneficial since it is considered the quickest way of acquiring a ready-made company. Entrepreneurs can buy one without needing to go through time-consuming procedures to register a new one. Other names of shelf companies are known are Shelf Corporation, blank check Company, aged company, and ready-made company.
There are several reasons why entrepreneurs prefer buying a ready-made company instead of registering a new one. The main reasons are:
- Saving time
- Avoiding red tape
- Being able to bid on contracts. In some cases, you might only be able to bid on those contracts if you have been in business for a specific amount of time.
- Needing a company number rapidly to sign a contract or a deal.
- Needing a VAT number to export or import goods.
- Attracting investors or customers by showing that the business has been running for a good amount of time.
- Gaining access to loans.
Lastly, it is important to take into consideration the fact that a shelf company should not be confused with a “shell company”. A shelf company is an already registered company ready to be bought. On the other hand, a shell company is a fictitious entity created to perform fraud and money laundering.
Benefits of shelf companies
As mentioned previously, several advantages come with shelf company formation in Saudi Arabia. Mainly, shelf companies allow you to make your business more trustworthy since customers and suppliers have more trust in businesses with long operating histories. Furthermore, a shelf company is already set up correctly, meaning that you do not have to go through tedious procedures to set up a new business.
More specifically, other advantages are:
The ability to gain new contracts and suppliers
As mentioned several times, since a shelf company already is registered, it already has a history. Moreover, a consumer or supplier can access the Internet and search for when a company was registered. This allows them to see the longevity of the company.
This is seen as a benefit since, in Saudi Arabia, it can be difficult to secure contracts or obtain suppliers. This is because your company is classed as a new start-up. Moreover, some industries prioritize companies that already have been registered and are in operation. Additionally, it is difficult to gain the trust of suppliers if you have recently registered your company.
Improve the confidence of new clients by showing that your business already has a history
For a business to be successful, it needs to have several clients as well as build confidence with them. Simply put, without clients, the company cannot be successful in any way. That is another reason why entrepreneurs prefer a shelf company formation in Saudi Arabia over registering a new company.
Research done in several parts of the world proves and determines that a client prefers a company that shows longevity over a new business. This is because a business with longevity gives the impression of being trustworthy, increasing confidence by showing that the business is experienced in its relevant field. A shelf company has this benefit since it helps you get the impression that your company has been around longer than it seems.
Additionally, companies can promote their anniversaries. This further shows the importance of having your company around longer, which new set-ups cannot do. This makes newly registered companies cannot give the same impression, making clients not able to have faith in them.
Save time and effort from setting up a company from the ground up
Starting and registering a new company in Saudi Arabia has a lot of time-consuming duties and procedures to complete. Even though in Saudi Arabia the process is not difficult it can still result in tedious in several cases.
However, by buying a shelf company in Saudi Arabia, you skip over these tedious procedures. This is because the company is already registered, meaning that you only need to change the officer details. This step is easily done since you can do it online and it only takes a few hours.
In addition to this, this benefit allows you to have the confidence of having a company that the previous owner set up correctly. Moreover, once you complete this step, you can begin operating the company just hours after purchasing it. This gives you one less factor to think about.
It makes it easier for companies to get bank loans and credit cards
This goes hand in hand with the first benefit. Since a shelf company formation in Saudi Arabia allows you to obtain a company that an expert already registered, you get a company with longevity. This makes your business a better standing when it comes to getting a bank loan. In other words, a bank sees a company with longevity as a more trustworthy investment than a start-up.
Furthermore, you will be able to extend your credit line. Sometimes, a corporate creditor does not extend the credit line to a new company in Saudi Arabia. Nevertheless, they are willing to do this for a proven corporation. This means that if you approach a proven corporation, it is more likely to get access to bank loans, credit lines, leases, banking relationships, etc.
This is a crucial benefit for a company´s early life since they want to build business credit. Nowadays, vendors extend credit to companies with at least 2 years of experience in the respective sector. In some cases, they require a personal guarantee if the business is very young.
Challenges of shelf companies
As with many other business types, a shelf company formation in Saudi Arabia can also bring several challenges. The main ones are:
Hidden liabilities of shelf companies
It is common knowledge that a shelf company should not be active under any business, nor have any asset and liability associated with it. Company formation specialists in Saudi Arabia recommend this to not be under any liability when buying a new company.
However, there are some cases where a shelf company has a hidden liability that entrepreneurs could not figure out before buying it. However, a trusted seller helps you avoid that when you decide to buy a new company in Saudi Arabia.
A growing number of scammers
When we refer to scammers in shelf company formation in Saudi Arabia, we refer to the fact that you might be scammed to pay more than the company is worth. Furthermore, sometimes, this amount is enormous in comparison to how much it costs. This means that you need to be careful before you choose to buy a shelf corporation from any seller. In other words, you need to ensure that the seller is trustworthy.
Other scams might be seen when it comes to established businesses or credit lines. A shelf company in Saudi Arabia should not have any of those. However, scammers might sell a shelf company with a tax record, personal guarantors, or an established credit line.
In addition to this, some scammers can even sell a shelf company with a bad credit history, or even try to sell a company they do not own. You need to ensure not to fall for these scams as they can be very expensive as well as force you to go to jail.
Age is not enough to get bank loans
Even though age is a factor that banks consider to give out loans to a company, it is not necessarily the most important one. Banks have learned this lesson after the financial crisis. This means that you should reconsider twice before buying a shelf company in Saudi Arabia if you only want to obtain an easy bank loan.
Nowadays, banks pay more attention to credit history, bank ratings, and other factors before giving out loans. However, as we mentioned, shelf companies do not have any of this. They do not have a business history, tax returns, or existing revenues.
Liabilities pass with the transfer of the company
If you decide to purchase a shelf company, you are also accepting responsibility for the liabilities of the company, as well as current and future debts. Although we mentioned that some people sell shelf companies with hidden liabilities, however, it is not illegal. These include those known at the time and those which are unknown or undisclosed.
For instance, VAT inspection by the tax authority in Saudi Arabia occurs, generally, every 5 years. During these 5 years, the shareholders of the company can change completely since the shelf company is sold.
This can be bad since current shareholders can suffer if the tax authority discovers errors in the company’s accounting resulting in an underpayment of tax. Even though the previous owners are the main cause of these errors, the authorities do not hold them liable.
Purchasing shelf companies
If you decide to go for a shelf company formation in Saudi Arabia, there are some processes you need to go through. These processes are the same globally, meaning it is general information you need to know. Firstly, those who provide a shelf company might need to do some changes to the company they are selling. These include:
- Changing the registered address of the company to the new address chosen by the purchaser.
- Transferring any shares of the shelf company to the purchaser that has been nominated.
- Changing the current directors. They need to replace the old directors with new ones that the purchaser appoints. Additionally, this process requires the existing directors to resign.
- Lastly, changing the company´s name to the name that the purchaser chooses
Individuals generally register shelf companies in Saudi Arabia with a standard constitution. Consequently, once you decide to buy a ready-made company, you also need to make changes to the constitution if there are any necessary ones.
Most individuals decide to go for shelf company formation in Saudi Arabia since they skip over tedious procedures to register a new company. Furthermore, they also gain fast access to 3rd equity as well as corporate debt financing.
However, as we previously mentioned, others decide to buy a ready-made company to attract potential clients. This includes customers, investors, business partners, and even banks.
What should you look for in a shelf company if you plan to buy one?
If you do decide to go for shelf company formation in Saudi Arabia, there are several factors you need to look for in a buyer. Firstly, you should look for a clean shelf corporation. As we previously mentioned, a good-shelf corporation should not have a bank account, a tradeline, or corporate credit. This is important since a company that has financial history might have pre-existing debt issues.
Moreover, you should steer clear of any buyer that cannot guarantee that the corporation’s fees have been kept current with the state. In other words, you need to ensure that the shelf company has always been in line with the tax authority in Saudi Arabia. This is because, if anytime, the vendor defaults on paying state fees, it shows on the public record.
Thirdly, do not trust any buyer that claims to provide corporate credit built into the shelf company. This cannot be possible since you cannot buy or sell corporate credit. In other words, if the buyer ensures the company has corporate credit built in, then it is not a clean corporation.
Here are four things you should look for in a buyer to ensure you successfully buy a ready-made company:
- Ensure that the provider chooses an aged shelf corporation that fits their client’s needs best.
- The vendor should be easily and readily reachable.
- You should get your vendor to guarantee that the shelf company should not have any assets, tradelines, or other liabilities.
- Lastly, you should ensure that while you are buying a shelf company in Saudi Arabia, it should come with certificates that ensure good standing as well as certified articles of incorporation from the state. Furthermore, it should have all the paperwork organized and ready for transfer.
How can we help you with your shelf company formation in Saudi Arabia?
We seek to help foreigners and ex-pats set up their businesses when they immigrate to Saudi Arabia. With our guidance, you will be able to keep up with Saudi Arabia’s changes in its laws. Consequently, we recommend you contact our legal professionals so we can help you and guide you in the right direction.
We are your best partners when it comes to business-related matters in Saudi Arabia. Nonetheless, we offer a wide range of services provided by the most experienced local specialists. From visa services to HR solutions such as payroll, we have you covered.
On the other hand, if you are looking forward to freelancing in Saudi Arabia, you can easily rely on us. This does not only cover immigration procedures but also the setup process of a virtual office for your independent business.
Interested in knowing more about shelf company formation in Saudi Arabia or other types of business formation? Contact us at +971 58 515 8876 or email us at office@companyformationsaudiarabia.com to get answers to your inquiries. Please feel free to contact our local agents for assistance in establishing a shelf company in Saudi Arabia.
