Last Updated: March 16, 2022
You may have seen the term ‘shell company’ on the news and have asked, what is a shell company? This article addresses what a shell company is, how one operates, how to open one, and FAQs concerning such a company.
What Is a Shell Company?
A shell company is like a safe box in the world of business. It’s not a distinct type of legal business entity. They simply serve as transactional vehicles for some other business affairs and have no assets or operations of their own. It doesn’t offer any services or products to clients and makes no money. It also has no employees and cannot be traded on the exchange market. The only regular company-like activity that it conducts is tracking the assets it holds.
Under the shell company definition, it’s a ‘shell’ in the sense that it conducts no business except for holding assets on behalf of the owners. According to the U.S. Securities and Exchange Commission (SEC), these companies have no assets or nominal assets, including cash or cash equivalents, and no active business operations.
Since these companies have been around for a while, many names have evolved for them, such as personal investment companies, international business companies, front companies, and ‘mailbox’ companies.
|NOTE: Shell entities often take the form of limited liability companies (LLCs). This type of company is essentially a hybrid of a partnership and a traditional business operation.|
How Do Shell Companies Work?
Shell entities are used as a ‘pass-through’ for moving financial assets from one place to another. For example, the owner of a shell company can transfer funds from a foreign country to their home country and vice versa. The company can also be left on standby and sit dormant until the owner needs it.
None of these activities is illegal. Front companies are permitted under the law, and many significant companies own and use such companies, including in the US. But the benefits they provide could give individuals the means to take part in questionable activities, some of which may include breaking the law.
Shell corporation owners can transfer money back and forth between two, three, or more shell entities, essentially creating a hall of financial mirrors that’s almost impossible to track. What’s more, most countries allow the real owners to remain anonymous, which creates ideal conditions to hide money and wash it.
There are legal ways in which shell companies operate. In addition to opening bank accounts and transferring funds, these companies allow their owners to buy real estate, conduct financial transactions, and collect royalties worldwide.
Some could also use shell companies to avoid paying taxes and gain access to new markets, including foreign stocks and exchanges. In some cases, they can help business owners avoid lawsuits if they exist in a foreign country protected from the US. For example, the owner of a shell company can wire money through their company and then claim it as business income in countries with low tax rates.
The Panama Papers leak, for example, is widely considered to be the largest scandal that revealed a myriad of ways in which the rich can take advantage of offshore shell entities and their tax regimes. The leak made public 11.5 million encrypted confidential documents that belonged to the Panama-based law firm Mossack Fonesca.
These leaked documents exposed a network of over 214,000 tax havens (mostly offshore shell companies) used by at least 12 national leaders and 143 politicians and their close family members and associates.
|NOTE: The Panama Papers scandal is one of the most significant leaks in history, providing 2.76 terabytes of data—more extensive than the US diplomatic cables released by WikiLeaks in 2010.|
|A shell company only exists on paper. It doesn’t have any active business operations, employees, or profits.|
|Their primary purpose is to hold business assets.|
|They are legal but can be used for illegal purposes.|
|They are often created as tax havens for tax avoidance.|
|They also help protect the identities of business owners.|
How Are Shell Companies Used?
These corporations can work as transactional vehicles of various firms and for a myriad of purposes. They are used by popular public companies, private individuals, and shady business dealers alike.
Shell companies are legal, depending on how they’re used. For example, hiding stolen assets is illegal, but buying a yacht with a shell company may not be.
Occasionally, a shell company is used to facilitate various illegal activities, so they have terrible reputations and invite more scrutiny (including from authorities) than other business entities.
These ‘ghost companies’ typically purport to perform some service that would usually require customers to pay with cash, such as beauty salons or plumbing services. Instead, the money launderer deposits the money with the shell company, which then sends it to their accounts.
The company also creates fake invoices and receipts to justify the cash, creating the appearance of a legitimate business operation. Additionally, the shell company can withdraw the money or send it to other corporations and then return it, making it that much more difficult for authorities to track.
Tax Evasion and Tax Avoidance
Many entities and wealthy individuals open a shell corp in so-called tax havens—places where they’re not required to pay as high taxes as they would be in their home countries.
Large corporations, such as Apple, have moved jobs offshore to take advantage of looser tax codes—a process called ‘offshoring’ or ‘outsourcing.’ Tax avoidance, in this case, is perfectly legal as long as the money that’s held in the shell company was made in that country.
But individuals often funnel their earnings through shell corporations in such a way that’s not regarded as personal income and, therefore, is not taxable—this amounts to tax evasion, which is an illegal activity. (This, admittedly, is a gray area, as rules vary from country to country.)
Just because someone has a shell company doesn’t mean they’re doing something illegal. On the contrary, these companies can provide significant benefits for individuals and corporations alike.
There’s a reason why some funds in a shell company are called shell trust funds. A company’s primary legal use is to hold funds for different reasons. For example, both companies and private individuals can temporarily store funds in a ‘mailbox’ company while preparing a business startup.
Some companies choose to keep their assets in a shell company to protect them before a significant acquisition or merger or simply make the transition easier. These corporations can also be used to keep capital stable.
For example, if you live in a country experiencing troubles with its economy, your capital would significantly decrease, which would not be the case if you keep your assets in a shell company offshore.
Invest in a Foreign Market
What is a shell company if it doesn’t let you conduct financial activities in foreign markets? Their owners can invest in capital markets outside of domestic borders and attract investment in that country through such corporations.
Protect Business from Lawsuits
These companies—which come in different shapes and forms, such as an LLC—can protect their owners from liability for the company’s actions. Thus, individuals and companies can use front companies to minimize liability for the use of certain transactions and specific assets.
It’s not unusual for wealthy families to open a shell corp to preserve family assets as part of a comprehensive estate plan.
These corporations are an ideal way to hide an owner’s identity since rarely are they required to keep a public record of the person or company that owns it. In addition, tracking down information about shell entities would typically lead to its managers, usually accountants or attorneys. So, finding the actual owner who possesses the assets is nearly impossible.
Many firms also use shell companies to collaborate with another business they don’t want to be associated with. For example, if a business has a bad reputation, the company will simply open a shell corporation and send money to that business through it.
An owner of a personal investment company can acquire another company by making a direct offer to shareholders—despite the disapproval of the target company’s management.
|NOTE: According to the 2020 State of Tax Justice report, countries collectively lose $427 billion each year to tax havens—$245 billion of the total is lost due to corporate tax abuse and $182 to private tax evasion.|
How to Create a Shell Company
These companies are known for being extremely easy to set up by registering online or by phone. The fees range from $200.00 to $3,000. What’s more, they require very little personal information.
An individual or business that wishes to set up one of these ghost companies must file with the U.S. Securities and Exchange Commission (SEC). Essentially, any startup company that has filed with the SEC is a shell entity as long as it doesn’t have physical properties—these can be a trust or an LLC.
If you’re not sure how to do it yourself, you can get a registered agent to set one up on your behalf.
While shell companies are excellent at hiding the identities of business owners, creating one still requires naming a director—who doesn’t need to be the owner or hold some power or authority. A director’s name (with proof of identification) simply must be placed on the company’s paperwork.
Most opt for tax havens when setting up this type of company. Countries that usually have low-income taxes require very little information, and in some cases, a lack of transparency.
According to the Corporate Tax Haven Index, the top tax haven countries where you can open an offshore shell company include:
- British Virgin Islands
- Cayman Islands
|NOTE: If you wish to know how to form an LLC, it’s quite simple. All you need to do is file Articles of Organization, choose a management structure, and obtain an EIN or FEIN. You’ll also need a registered agent— one of the top registered agents.|
Each country has different laws when it comes to shell corporations. The US has officially banned anonymous shell entities. Congress passed the National Defense Authorization Act, which included a provision that requires most companies to report their owner’s name and some basic identifying information to the government.
Some have asked, ‘are shell companies illegal in India?’ The short answer is no. It is still legal to hide the identity of an owner of a shell company in India. But the country has introduced several laws in the last two decades that aim to curb illegitimate activities that are usually connected to these entities.
For example, the Indian government can confiscate property for money laundering and impose taxes and penalties on undisclosed foreign assets and income.
Until recently, only law enforcement requests could have forced shell trust funds to reveal their actual business owners in the UK. But, in December 2020, a law went into effect that requested territories should provide this information to a central register.
|NOTE: Each year, the EU releases a tax haven blacklist—a list of countries that fail to comply with criteria to improve global tax fraud and evasion. These countries (which the EU considers tax havens) are pressured to make changes to their tax codes and may even face sanctions.|
What is a shell corporation? It’s a business entity that’s an excellent choice for wealthy individuals or major corporations who want to protect themselves from lawsuits and liability. They also allow people to attract investment in foreign markets, conduct hostile takeovers, and reduce the amount of taxes they’re paying legally.
Keep in mind, however, that they have a bad reputation and are constantly under scrutiny. More governments are cracking down on shell entities, which aim to hide the identification of the owner.
It’s perfectly legal and brings legitimate benefits to a business. But, unfortunately, these companies have a bad reputation because they’re often used for tax evasion and money laundering, especially since they do an excellent job hiding the owner’s identity.
Whatever the owner wants it to be. They’re great for holding assets, conducting hostile takeovers, taking part in foreign markets, and tax avoidance (in some instances). These are all legal uses of a shell company.
If you want to obtain a more detailed and precise explanation, it’s probably best to seek advice from a lawyer or seek an online legal service.
This largely depends on where you set it up. It’s typically easier to set up a shell company in a tax haven with looser tax laws and doesn’t require much private information about the owner. Fees can vary from $200.00 to $3,000.