In Short
- A shell company is typically an entity with no active business operations that holds assets or cash but does not trade or employ staff.
- While they can be used for legitimate business reasons like capital raising, accessing foreign markets or restructuring, shell companies can also serve improper purposes such as tax evasion or money-laundering.
- Using a shell company carries legal and reputational risks: without expert advice you may inadvertently breach regulations, and anonymity isn’t guaranteed.
Tips for Businesses
If you’re considering using a shell company, ensure you’ve clearly defined its legitimate business purpose, undertaken thorough legal and tax due diligence, and implemented robust governance to mitigate compliance and reputational risks.
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. In the UK context, shell companies are legitimate business structures that must still comply with Companies House filing requirements and UK corporate law, even though they have no active trading operations. Primarily, shell corporations are used for financial transactions.
Business owners often establish offshore shell companies in tax havens (such as the Cayman Islands). A tax haven is a jurisdiction that offers significant tax advantages to foreign individuals and companies, typically through low or zero tax rates, banking secrecy, and minimal reporting requirements. 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’ income. It is essential to distinguish between tax avoidance (a legal form of tax planning) and tax evasion (an illegal act). UK residents and companies must still declare worldwide income to HMRC, regardless of where shell companies are incorporated.
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. However, under UK law, there are limits to anonymity. The Persons with Significant Control (PSC) register requires UK companies to identify individuals who own more than 25% of shares or voting rights, and this information is publicly available through Companies House. As a result, business owners will sometimes use shell companies to conduct transfers between each other for illegal purposes, such as money laundering. The UK’s Money Laundering Regulations 2017 require businesses to conduct due diligence on shell companies and report suspicious transactions to the National Crime Agency.
Continue reading this article below the formReasons 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 establish a shell corporation to raise capital, such as by utilising a Special Purpose Acquisition Company (SPAC). A SPAC is a publicly traded shell company created specifically to acquire or merge with an existing private company, thereby taking the private company public without going through the traditional IPO process.
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.
Additional legitimate uses include:
- creating joint ventures with international partners;
- facilitating complex corporate restructuring;
- establishing holding companies for intellectual property rights; and
- setting up pension schemes or employee benefit trusts.
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 engaging in illegal practices, and you may face criminal prosecution.
Other disadvantages include:
- increased regulatory scrutiny from HMRC and other authorities;
- difficulty opening bank accounts as banks are wary of shell companies;
- potential reputational damage if the company’s shell structure becomes public;
- higher compliance costs due to enhanced due diligence requirements; and
- risk of being caught by anti-avoidance legislation such as the General Anti-Abuse Rule.
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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;
- 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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