What is a Shell Company?

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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. 

How is a shell company formed? How does a shell company make money?

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. Shell companies are more often than not registered to a different firm or company that provides services to shell companies, including receipt of legal correspondence. Because of this, law firms and lawyers are often included in their formation and can help simplify the process. Further, since shell company’s do not hire employees or create products on their own, they do not generate a revenue. However, their exact purpose, storing money and engaging in financial transactions, is what allows these companies to be sustainable. 

What are the advantages and disadvantages of a Shell Company?

Shell companies create a harsh reality where people can act through companies and be completely hidden from the world. For instance, criminals have used shell companies to launder. Because Shell Companies tend to exist only on paper as they do not have a physical presence, many people are turned away from the idea of forming a Shell Company as it carries with it the reputation that it is a risky business choice that can damage a company’s credibility.

However, as previously stated, this is a common misconception as a Shell Company can provide a company with tons of benefits—as long as it is used for legitimate purposes that follow the law. Shell Companies are advantageous because they allow assets to be placed in the company. 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, he could sell the shell company and avoid registration fees and taxes on the sale of the yacht. One of the most advantageous characteristics of a Shell Company is that they allow U.S. companies to lower their tax bill in the U.S. 

Do Shell Companies pay taxes?

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 retain 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.

If you are interested in learning more about a shell company and how it can legally benefit you, it is best to speak with a lawyer who can guide your through your legal advantages and how you will benefit, or not, from it. 

EPGD Business Law is located in beautiful Coral Gables, West Palm Beach and historic Washington D.C. Call us at (786) 837-6787, or contact us through the website to schedule a consultation.

*Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns. Contacting us through our website does not establish an attorney-client relationship.*

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