Definition of Shell Corporation
Shell Corporation is a vehicle for business deals and financial transactions for individuals or companies without having assets or operations of its own. Shell Corporations can exist for legal and illegal purposes. Legal purposes include Setting up trust, start-up business, conducting financing activity through Shell Corporation, Tax avoidance, overseas investment, Attracting investment from foreign markets, maintaining secrecy in identity and operations, etc.
Shell Corporation when the company exists in the paper but without an office, employees, active operation or assets. Such companies might have a bank account and passive investment holding in their name. Law allows the existence of such companies, but sometimes such companies operate business as masked from Law enforcement for purpose of tax evasion, money laundering, illegal business operations, etc. Shell corporations do exist for legal purposes for various reasons like acting as trustees, the startup used for attracting investment, taking over other companies, etc.
What is Shell Corporation?
Illegal purposes for Shell Corporation include Money Laundering, Criminal Activities, tax evasion, fraudulent business activity, hiding identity from the law, etc. Legally Shell Corporations are allowed in the market but because of many illegal activities such companies have created a bad reputation and remain consistently under the surveillance of law, new rules and regulation have been introduced in the market to avoid illegal use of such Corporations.
This can be formed by anyone whether large businesses or individuals. For large businesses, such companies are used to avoid tax, financing purposes to start business operations. But, tax avoidance is many times considered as a loophole for tax evasion so such companies might come under surveillance. While many black-market activities are done through shell companies, so the owner of such companies will not be in trouble.
Securities Exchange Commission (U.S.) defines Shell Corporation as:
- No or nominal operations
- No or Nominal Assets
- Assets consisting of cash and cash equivalents. or
- Other nominal assets with cash.
Example in Shell Corporation
Company X and Company Y are peers operating in electronics and listed on the exchange. Management of company X decides to form Shell Corporation under Name ABC ltd which does not have many assets but in the intention of investing in other companies. Over years slowly ABC ltd buys stocks of Company Y from the market eventually gaining a controlling interest in the Management of Company Y. Such use of Shell Corporations can lead to a Hostile takeover.
Purpose of Shell Corporation
- Tax Haven: Many large companies prefer to set up shell companies to invest in tax heaven countries. When the company invests abroad for outsourcing they earn profit and tax regulation in that country which will help the company to avoid a large amount of tax, at the same time legal entity remains different.
- Investment: If a business wants to invest in the foreign market for better returns, setting up Shell Corporation in that country gives access to capital markets for investment. Businesses can start their operations abroad and attract investment in that country through such companies.
- Takeover: Especially in hostile takeover when one company takeover another company without management approval through capital market investments.
- Go public: Instead of Initial Public Offering (IPO), which is a large process, private companies can go for the public through the process of the reverse merger.
- Hide Transactions: Original business can hide its transactions through shell corporations in case the company does not want to disclose its dealings with certain companies.
- Hide identity: Many owners prefer to hide their identity to avoid a lawsuit against involvement in criminal activities. People living in dangerous countries use shell corporations to hide their money from criminals.
Process Of Shell Corporation
A company must be registered under the law in the country it decides to start a business. For E.g. Shell corporations to start their business in the U.S. must be registered with the Securities Exchange Commission (SEC). Initial registration fees must be paid and the company should submit necessary documents. Private information of registered director and owner is required, many business owners appoint other people as nominee directors and file paperwork with their name to register.
Multiple businesses: To maintain a high level of secrecy Shell Corporation is registered as a subsidiary of another Shell Corporation operating in different countries. Multiple companies are formed in different countries to maintain the secrecy of owners and protection against investigation from the law from a specific country.
Choice: Certain places are more popular than others for shell corporations
- Switzerland: Swiss Bank accounts.
- Cayman Island
- British Virgin Islands
- United States
Shell Company vs Shelf Company
|Shell Company||Shelf Company|
|Definition||A company act as a vehicle for business deals without having its own operations or assets.||The company, which has remained inactive in terms of operations or purpose over a period.|
|Purpose||Tax avoidance, expansion, financing activity, secrecy||Save Time, Starting operations, gaining trusts|
|Law||Shell companies have certain rules while starting, but does not require much information and can be formed without assets.||Shelf Company abides by all rules and regulations. The buyer of the Shelf Company needs to register, transfer shares, change the address and provide relevant information.|
|Use||Holding Intangible assets, overseas transactions, outsourcing, and financing.||Avoid long procedure of registering a new company, applying loan bidding contract is easy because it already exists in the market|
|Illegal Activities||Money Laundering, Tax Evasion, criminal activities.||Mislead customers, employees|
Advantages and Disadvantages
Below we will learn about the advantages and disadvantages:
Below are the following advantages:
- Growth: Setting up Shell Corporation will help the business to grow while limiting the tax burden on business legally. Businesses can start their operations in the new market or expansion in the foreign market where tax rates are low. This will eventually increase the level of profit earned by the company.
- Better Investment Options: Shell corporation formed in a foreign company will give business or owner the opportunity to invest directly in the foreign markets through a company formed in that market. This will give direct access to the security market of a foreign country where the investor can get better results and more options.
- Protection from Lawsuit: Some individual prefers to protect certain asset through investment in Shell Corporation in a country, where these assets cannot be seized. If Taxes are paid Individual can maintain certain secret assets through shell corporations.
- Safety of identity: Many individuals prefer to invest or form Shell Corporation to protect their identity in a certain business. Although this practice can be used for criminal activities, many individuals living in a dangerous area prefer to protect their investment and identity through such investment options.
Below are the following disadvantages:
- Risky: There is a high risk involved in investing in Shell Corporations since it can be formed with little information and can be used for different operations. The investor might end up investing in illegal activity unknowingly, which will make him/her part of the crime.
- Bad Publicity for Business: Although operating business under Shell Corporations can be better for business to operate in a market and lower their taxes. It can come under tax evasion if not done properly and at the same time loss of jobs in the home country subsidized by Shell Corporation, which operates in other countries, can create a bad image of the business in the domestic market.
- Legal Issues: Investment in Shell Corporation for the purpose of hiding assets can be illegal since hiding income or assets from the tax department will be considered as tax evasion and can be brought under criminal penalties.
- Not for Everyone: Only people with large wealth will prefer to invest in shell corporations. People working as employees will not be able to hide their income since employers report the tax department about earned income.
- Can lead to Scandal: Scandals like Panama Papers, offshore leaks resulted in information leak, which leads to the investigation of various celebrities, politicians, government officials, criminal investments in case of tax evasion and money laundering.
It is better to take legal advice before investing in Shell Corporation since it has multiple risks. Still, Shell corporations play a vital role in markets around the globe, because there are various purposes and benefits available for such investments. From the government’s point of view, strict rules and regulations required such investment to avoid fraud money laundering, and tax evasion cases in the future. Countries like the UK, U.S., and India have set up various committees and agencies to maintain surveillance over shell corporation’s activities. Many countries are making rules regarding compulsion for people in a country to declare entire wealth.
This is a guide to Shell Corporation. Here we discuss what is Shell Corporation along with its purpose, process, example, and respective advantages and disadvantages. You can also go through our other related articles to learn more –