Named for David Shelton (1812-1897), who served in Washington's territorial legislature, the town had its origin in a lumber mill built in 1884 on Oakland Bay. Although this mill and the subsequently built logging railroad that serviced it went out of business after only two years, the equipment, virgin timber, and presence of David Shelton's nearby farm land caught the interest of Seattle investors. David Shelton platted his land and began selling lots, and the settlement prospered.
Officials for the new Town of Shelton were held on the same day as the incorporation vote. David Shelton, perhaps unsurprisingly, was elected mayor. William Dunbar (b. 1854), Daniel M. Duckworth (b. 1840), William Clark, Arthur Needham (1859-1915), and William L. Sargison (b. 1860) were elected to serve as the town council. A. F. Metzger (1862-1948) was elected treasurer.
The Mason County Board of Commissioners passed an Order to Incorporate to the offices of the Secretary of State on May 19, 1890, where the paperwork was filed on May 23, 1890.