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As a business owner, you may have come across the idea of a shell corporation. The media will often portray shell companies as tax havens and a method of tax avoidance or tax evasion. However, the use of shell corporations does not strictly fall under illegal purposes. Often, businesses will use shell corporations for legitimate reasons such as capital raising. This article will break down what a shell company is and explain some of the advantages and disadvantages of using one.
What is a Shell Company?
A shell company is a business that usually has financial assets and holds funds but has no active business operations. Shell corporations will not have employees. Additionally, they will not engage in trade on a public market, nor do they generate any money. Instead, shell companies typically hold assets on behalf of other business entities or wealthy individuals. Primarily, shell corporations will deal with financial transactions.
Business owners often establish offshore shell companies in tax havens (such as the Cayman Islands). A tax haven is a country that facilitates tax avoidance through low tax liability for businesses. By starting a new company in a foreign country, businesses can avoid dealing with law enforcement in their home country. Usually, you will find that using an offshore shell company for tax avoidance is legal. However, the company’s country must generate the business’s income.
How Do Shell Companies Work?
The defining feature of shell companies is to manage money (through their bank accounts) rather than for active business operations. However, the term ‘shell company’ can sometimes refer to a corporation with no significant assets or business purpose. For example, a shell company may also exist as the remains of a business that has sold all of its assets.
Furthermore, the owner can usually transfer funds between the shell company and other business entities. Additionally, the company owner may also choose to remain anonymous in records. As a result, business owners will sometimes use shell companies to conduct transfers between each other for illegal purposes, such as money laundering.
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Reasons for Setting Up a Shell Company
Despite the illegal uses for shell companies, there are legitimate reasons for establishing one. For instance, you may decide to set up a shell corporation to raise capital, such as by using a Special Purpose Acquisition Company (SPAC). A SPAC is a shell company set up to carry out an initial public offering (or IPOs). Additionally, the business owner will use the proceeds to merge with a target acquisition company. This has become a popular alternative to traditional IPOs as a method of capital raising. Furthermore, you might also temporarily establish a shell company to hold funds before setting up a new company. For example, if you are stripping your existing company of its assets and starting a new business.
There are various other reasons for setting up a shell corporation, including:
- investing in a foreign market because owning a business (even a shell company) makes it easier to make investments in a different country;
- to hide your identity, for example, if you are doing business in a dangerous country where your identity is best kept hidden;
- staging a hostile takeover, where you conduct the takeover using the shell company; and
- protecting business assets, for example, from a lawsuit or a potential economic disaster in your home country.
Disadvantages of a Shell Company
While shell companies can help achieve specific business goals, they can also often operate in a legal grey area. This is especially the case if you hold assets in a different country. Without professional legal advice, you risk conducting illegal practices, and you could face criminal prosecution.
In addition, while shell companies protect the owner’s anonymity, this is not always a failsafe. For example, a data leak can expose shell company ownership.
Key Takeaways
As a business owner, you should be aware of shell corporations and their many uses, as they can benefit your operations. Ultimately, shell companies do not run their business operations and typically only hold financial assets or cash equivalents. Sometimes, business owners may use shell corporations for illegal tax evasion and money laundering purposes. However, you can also set one up for legitimate reasons, such as:
- capital raising;
- legal tax avoidance purposes;
- accessing foreign markets; and
- initiating hostile takeovers.
If you need assistance setting up a shell company, our experienced startup lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today at 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A shell company has no active business operations and usually only has financial assets or cash equivalents.
An initial public offering (or IPO) is where a company becomes listed on a public market for the first time.
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