Not to be confused with the oil and gas company of the same name, shell corporations are businesses—sometimes sketchy, other times not—that are not as established and function without solid operations and without large assets. Shell corporations are most commonly used for start-up businesses, companies looking to raise capital, and businesses interested in going public on the stock market. While not as common, shell corporations can be used to hide illegitimate companies’ suspicious business practices.
Why Are Shell Corporations Used
Shell corporations are used to manage and hold another establishment’s assets and financial transactions while occurring tax benefits. Along with tax incentives, there are many reasons why shell corporations are used:
- Start-up companies can hold their money in a shell corporation prior to launching
- If two companies are looking to merge, or a single company is becoming acquired by another, the company/companies can store its/their assets under a shell corporation
- Companies also use shell corporations if they are looking to disassociate with a company they’re working with
- Shell corporations offer little to no tax rates on the assets within them (this also make shell corporations desirable to those looking to conduct shady businesses and find a way to not have to pay taxes)
How Are Shell Corporations Used?
Shell corporations are used by business owners who don’t want to disclose their identities and handle their business assets in a private manner. As mentioned above, however, shell companies are mainly used to avoid taxes.
There are places in the world that are referred to as “tax havens”—like the Cayman Islands, the Bahamas, and Bermuda. Some businesses will move part of their company’s assets into an offshore account (usually in a tax haven area) in an effort to steer clear of being taxed. While this may sound illegal, it is perfectly legal assuming that the money in the shell corporation was earned in the tax haven, otherwise, there could be legal ramifications.
Example of a Shell Corporation
A good example of a shell company is when one company goes bankrupt and another company purchases the bankrupted company. When the new company purchases the bankrupt company, the valuable assets of the bankrupt company will move into a shell company. This is done so that the company that purchased the bankrupt company can restart or combine with the bankrupt company and have a clean slate, as once the valuable assets are moved into a shell corporation, the bankrupt company is dissolved.
What to Look For to Make Money
The rule of thumb here is to not make or invest in a fraudulent company. Shell corporations are a great tool and resource if you’re looking to start a new business or if you’re interested in investing in a start-up. But if you’re looking to simply avoid taxes and screw over a few people, it’s your best bet to keep dreaming unless the thought of jail appeals to you (and if it does, then you probably have more problems than just creating an illegitimate business).
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