What is a Shell Company?
A shell company is an entity that does not have any active business operations or significant assets. Most people believe that shell companies are illegal. They are legal but are often used illegitimately, such as to disguise ownership or hide assets. The only business practice that shell companies partake in is keeping track of the assets they hold, which is usually not much.
A shell company can be created when shareholders of a private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a “shell” since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors.
What are Shell Companies Often used for?
Shell companies can act as a vehicle for tax avoidance. Other companies use shell companies to acquire different forms of financing. The number one legitimate reason for shell companies is to realize a tax haven abroad, such as Panama or Switzerland. Shell companies allow U.S. companies to lower their tax bill in the U.S. That’s because some tax havens do not report any tax information to the U.S., making it possible to defer taxes and hide offshore bank accounts. It is also possible to avoid taxes because the profits of an offshore shell company are not taxed in the U.S. until they “return to shore.” Shell companies can be used to protect assets since there is no public record of the owner of the company. Some companies put their assets in a shell company before they go through a big acquisition or merger to simplify the transaction and protect their assets. Shell companies can also be used to keep capital stable. For example, if you lived in Greece these past few years, your capital would have decreased alarmingly, but if you kept your assets in a shell company offshore, you could have avoided the volatile Greek economy.
Another benefit of a shell company is that assets can be placed in the company and the company can then be sold to avoid taxation on the sale of the assets. For example, a millionaire could list his yacht as the property of a shell company. Instead of selling the yacht, she could sell the shell company and avoid registration fees and taxes on the sale of the yacht.
What is a Downside of Shell Companies?
With all of these benefits for those that use shell companies legitimately, it is troubling to some that they can be set up so easily. Shell companies create a harsh reality where people can act through companies and be completely hidden from the world. Criminals have used shell companies to launder.