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What Is A Shell Corporation
A shell corporation is a corporate entity that does not have any business operations or does not own any assets.
In other words, a corporate entity is legally formed but is not used to operate an active business.
Typically, shell corporations are used to hold liquid assets or perform financial transactions.
For instance, when you incorporate a company, you legally create a business entity authorized to do business.
However, if you don’t do anything with the corporate entity that you created, then it’s considered to be a shell corporation as you only have a corporate “shell” that does not do business and does not earn any revenues.
A shell corporation can be used for lawful purposes but can also be used for illegal activities as well.
Lawful reasons can include the startup of a new business, creation of a shell entity to pursue mergers and acquisitions, or lawful tax avoidance.
On the other hand, shell corporations can be used illegally for tax evasion purposes, to hide asset ownership, or illegally raise funds.
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How Does A Shell Corporation Work
A shell corporation is legally formed corporation that does not actively operate a business.
Rather, a shell corporation can hold cash, liquid assets, or be used to perform financial transactions.
Although the name shell corporation tends to be used in an unlawful context, you can use a shell corporation for both legal and illegal purposes.
Large companies tend to use shell corporations for lawful tax avoidance strategies.
For instance, a shell corporation can be incorporated in a jurisdiction with advantageous tax treatments.
This way, the company can reduce its overall tax burden by shifting business assets or liabilities.
You may have heard of companies using a shell corporation located in a tax haven to reduce their overall tax liability.
Essentially, a shell corporation is a corporate entity that has been duly formed but does not actively manage any business or do any meaningful commercial activities.
You will need to file the corporation’s articles of incorporation, pay your filing fees, appoint a registered agent, and reveal its beneficial owner’s name.
A shell corporation has the ability to do anything that a normal corporate entity can do, such as own assets, open a bank account, sign contracts, file a lawsuit, or even get sued.
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Legal Use of Shell Corporations
Shell corporations can be highly useful in business.
Savvy entrepreneurs and sophisticated businesses use shell corporations to increase their profitability, reduce risk, and scale their business.
A common use of shell corporations in business is to stage a hostile takeover.
In other words, a company looking to acquire another entity will create a shell entity used to engage in a hostile takeover bid.
Another reason why a company may create a shell corporation is to hold on to highly liquid assets.
In this manner, the cash or marketable securities are sheltered and protected until the company managers decide what to do with the funds.
A shell corporation can also be used in the context of a reverse merger where a shell company that is publicly traded acquires a private company, allowing a private company to go public.
Other reasons lawful reasons shell corporations are used is to invest in foreign markets, protect assets from lawsuits, or hide a business owner’s name.
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Illegal Use of Shell Corporations
Although shell corporations can be beneficial in business, they are also known to be used in illegal ways and by criminal organizations.
Over the course of the years, criminal organizations have used shell corporations to launder money or hide cash that has been illegally obtained.
Another important illegal purpose for creating a shell corporation is for tax evasion.
There are countless instances of shell corporations incorporated in countries that have little tax law enforcement allowing the company owners to evade taxes normally due in their own jurisdiction.
Also, individuals may use shell corporations to hide their personal assets from the government or frustrate creditors from being able to seize their assets to satisfy a legal obligation or judgment.
Alternatively, individuals and criminal organizations may operate illegal businesses using a shell corporation, such as the sale of drugs, illegal substances, arms, or others.
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Shell Corporation FAQ
Is a shell corporation legal?
Owning a shell corporation is legal in most jurisdictions around the world.
Fundamentally, a shell corporation is a corporate entity that is properly formed and in good standing within its jurisdiction of formation.
The way the shell corporation is used can be legal or illegal.
If the shell corporation is used for lawful purposes, then the purpose of the shell corporation’s activity will be legal.
However, if the shell corporation is used for unlawful purposes, then the shell corporations activities will be considered illegal.
As you can see, it’s not that owning the shell corporation in of itself that is illegal but it’s what you do with it that can be legal or not.
What are shell corporations used for?
There are many legitimate business reasons why shell corporations are used and are highly effective.
You can use a shell corporation to purchase real estate assets, hold intellectual property rights, engage in a hostile takeover, perform a reverse merger, or to execute tax avoidance strategies (which is to legally reduce your tax liability).
How do you create a shell corporation?
To create a shell corporation, you must follow the rules and requirements of the jurisdiction where you are looking to form the corporate entity.
Typically, a shell corporation is created by filing its articles of incorporation, paying the filing fees, getting a certificate of incorporation, and holding an organizational meeting to issue the shares, appoint the board members, set up the company bylaws.
Why do shell corporations exist?
The three main reasons why shell corporations exist and are used is to allow companies and individuals execute tax avoidance strategies to reduce their tax liability, shelter personal assets or property from claims, or use it in mergers and acquisitions.
Takeaways
So there you have it folks!
What is a shell corporation?
In a nutshell, a shell corporation is a legal entity that is not used to operate an active business.
Shell corporations can be used for legitimate or unlawful purposes.
Typically, shell corporations are used to perform certain financial transactions, perform a reverse merger, engage in a hostile takeover, purchase or sell certain assets, or hold cash.
However, shell corporations also have a bad reputation as they are used to evade taxes, hide assets, launder money, and operate illegal businesses.
It’s not illegal to do business with a shell corporation but if you find yourself doing business with one, it’s best that you take extra precautions to ensure you are doing business with a legitimate shell corporation.
Now that you know what a shell corporation is all about and how it works, good luck with your research!
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