You have likely come across the ‘shell corporation’ in the news and wondered if there are any benefits to setting one up for your business.
A shell company or shell corporation is basically a registered business entity that doesn’t conduct have any business activity. The name “shell” refers to the empty shell of a company.
Shell companies are used for a variety of purposes, some of which are legitimate while others involve committing financial crimes.
In this article, we explain what a shell company is and why they are used.
What Is a Shell Company?
A shell company is a type of business entity that exists primarily on paper and has few, if any, active business operations, financial activity, employees, or assets.
While there are legitimate uses for shell companies, they can also be used to hide ownership of assets or income or to avoid paying taxes. For example, a shell company can be used to purchase real estate, but the ownership of the property is hidden by listing the shell company as the buyer.
They can be registered in any country, but are often registered in offshore tax havens, like the Bahamas, Bermuda, British Virgin Islands, Cayman Islands, and Switzerland which can make offshore shell companies difficult to track.
While there are legitimate uses for shell companies, their secrecy makes them attractive to criminals and those looking to avoid taxes. For this reason, shell companies have been the subject of increased scrutiny in recent years.
How Does a Shell Corporation Work?
Shell corporations are often used to hide the beneficial owner of an asset or income stream. The ownership of the shell corporation is typically hidden by listing nominee directors and shareholders.
The assets of the shell company may be held by a trust, another company, or an individual. The income from these assets is then funneled back to the beneficial owner through the shell company.
This can be done for legitimate purposes, such as to protect the assets from creditors, or for illegal purposes, such as to avoid paying taxes on the income.
Why Are Shell Companies Used?
Shell companies can be used for legitimate or illegitimate purposes. Some legitimate uses of shell companies include:
- Hiding ownership of assets: A shell company can be used to purchase real estate, but the provides anonymity of ownership by listing the shell company as the buyer.
- Tax avoidance: A shell company can be used for wealthy individuals to funnel income from assets such as royalties, or copyrights back to the beneficial owner in tax havens with lower tax rates in order to reduce or avoid taxes on personal income. This is a gray area in tax regulations and if not done properly can lead to charges of tax evasion.
- Protecting assets from creditors: A shell company can be used to hold assets, such as property or investments, that you want to protect from creditors.
- Raising investment: In the United States, the Securities and Exchange Commission (SEC) allows the use of shell corporations to conduct a reverse merger, which lets a private company go public without an initial public offering (IPO).
Some illegitimate uses of shell companies include:
- Money laundering: Shell companies can be used to hide the source of financial transactions and make them appear to be coming from a legitimate business.
- Fraud: Shell entities can be used to commit fraud by hiding the true ownership of a company or misrepresenting the company’s financials.
- Evading sanctions: Shell companies can be used to evade sanctions by hiding the ownership of assets or businesses.
- Tax evasion: Shell companies are often used to evade tax by hiding taxable income and assets in a bank account in a different country
Are Shell Corporations Legal?
Shell companies made the headlines in 2016 in the Panama Papers leak. The Panama Papers was a release of 11.5 million documents that revealed the use of shell companies and offshore accounts to hide wealth and evade taxes.
While there are legitimate uses for shell companies, their secrecy makes them attractive to criminals and those looking to avoid taxes. For this reason, shell companies have been the subject of increased scrutiny in recent years.
Since then, the U.S. Department of Justice has aggressively cracked down on shell companies through the Kleptocracy Asset Recovery Initiative. The initiative is aimed at tracing and recovering assets that were purchased with proceeds from corruption and other crimes.
While there are legitimate uses for shell companies, you should be aware of the risks associated with them before you decide to use one.
If you are thinking about using a shell company, we recommend that you speak to an attorney who can help you navigate the legal and regulatory landscape.