Shell Corporations Explained: How Shell Corporations Work

A shell corporation is a company that has no employees and no physical presence, but it may still possess financial instruments such as a bank account. Effectively speaking, shell corporations only exist on paper.

Shell companies are sometimes used to mask illegal business practices, including contraband sales, money laundering, and income tax evasion, yet they serve a purpose in legitimate business operations. Real estate partnerships may form shell corporation subsidiaries to hold property assets. Studios, publishers, and creative artists may form new companies to hold intellectual property (IP) and copyrights.

Shell corporations are legal in nearly all of the world's countries. They can be use for legitimate financial transactions, which often involve the sale of real estate and intellectual property. In the United States, the Securities and Exchange Commission (SEC) permits private companies to use shell corporations as part of a maneuver called a reverse merger, which lets a business go public without an initial public offering (IPO).

Frequently, however, shell corporations are used for illegal purposes. Notably, companies and individuals use offshore shell companies to illegally diminish their tax liability. By creating a shell corporation in a foreign country such as Switzerland, Bermuda, Seychelles, or the Cayman Islands (all notorious tax havens), companies can park their money in those nations' financial institutions and avoid paying any US taxes. Shell corporations are also used in money laundering, where criminal activity (such as selling drugs or counterfeit goods) is masked through a series of shell bank accounts whose owners cannot be traced.

Shell corporations must abide by certain regulations.

• Shell companies must be formally registered. In the United States, shell corporations register with the US Securities and Exchanges Commission (SEC). They are particularly popular in US states that offer corporate tax benefits. South Dakota, Nevada, Wyoming, and Delaware are home to a disproportionate number of US shell corporations.
• Shell companies must have registered agents. A shell corporation's registered agent must file the necessary paperwork with a governing municipality upon incorporation. They also pay any required taxes or fees on behalf of the company.
• Shell companies must reveal a beneficial owner. A beneficial owner is someone who exercises substantial control over the company. However, shell corporations can shield an owner's identity by registering as a subsidiary of another shell corporation. In fact, a shell corporation operating in one country could be a subsidiary of a different shell company incorporated in a different country. This makes it difficult for law enforcement to employ anti-money laundering tactics against these corporations.

Shell corporations can serve several purposes:

• Real estate: Some business partnerships establish shell corporations for the purpose of real estate acquisition. This is particularly true in foreign markets, where local buyers may enjoy tax advantages.
• Holding intellectual property: Production companies use shell corporations as a way of owning intellectual property and shielding it from lawsuits or other forms of seizure.
• Hostile takeovers: A group of investors attempting a hostile takeover of a public company may set up a shell corporation to take ownership of the company should the hostile takeover succeed.
• Reverse mergers: Some private companies use shell corporations to go public using a technique called a reverse merger, which is swifter and less expensive than a typical IPO.
• Tax avoidance: A great number of shell corporations set up in foreign countries exist in order to shield their owners from local tax liabilities.

All investments and investment strategies entail inherent risks and introduce the potential for financial loss or the depreciation of assets. The information presented in this article is for educational, informational, and referential purposes only. Consult a professional investment advisor before making any financial commitments.

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