What is Shell Company?
Shell company is a company existing only on paper but not in reality. It does not have any authentic business transactions nor involved in exchange of good or services. Shell companies have no office, no workforce but may have bank account for doing fake financial transactions in order to validate their existence. These companies are often established with the motive of entering into illegitimate transactions for evading taxes or involving into money laundering practices.
Concept of Shell Company
Shell companies are brought into existence in similar way as normal company is registered, but instead of transacting into ordinary business transaction gets involved into illegal activities. The illegal activities carried out under the name of shell company are avoiding tax liabilities, laundering unaccounted money, hiding ownership details from law enforcement agencies, raising capital and many more.
Therefore, shell company as its name suggests, is just a shell having nothing inside it. These are more commonly used by well-known public companies, private individuals and shady business dealers. Shell companies are not only used for illegitimate purposes at all the times, but also used for legitimate purpose such as business entity used by start-up companies for raising capital, legal entity giving form to company intending to go public and acting as legal entity for taking over another business through reverse merger.
Reasons for Creation of Shell Company
Shell companies are usually formed by high-earning individuals or companies with below mentioned motives: –
Evasion of Taxes
Shell companies are largely used by high income earners and companies for the purpose of both avoiding as well as evading taxes. Tax avoidance involves avoiding the tax payments in line with tax regulations, whereas tax evasion is simply illegal or unlawful avoidance of tax. Shell corporations are quite easy to set up and difficult to trace due to which they are frequently used for tax evasion purpose. People hide their real taxable income for evading tax in shell companies that are established in some different country. Many countries have less tax regulations and little tax rate, and are referred to as tax havens. Big corporations set up their shell companies at these offshore locations. Examples of tax haven locations are Switzerland and Panama.
Hiding identities of real owners
It is very problematic task to find the owner identity of shell companies. The company owners are successfully able to hide their identity as they are incorporated with completely different details. Also, registered office location of company or director is established at completely different place to what is mentioned in incorporation form to registrar. This makes tracing of shell companies very difficult thereby allowing owners to maintain complete privacy of their identities.
Shell companies are also used for concealing of assets during cases of court and divorce, acquisitions and merger. Individuals utilize shell companies for saving their assets and avoiding them from sharing at the time of divorce, avoiding assets seizure during litigation or preventing being taken off during corporate merger and acquisition. However, hiding the assets deliberately in this manner is illegal and fraud in eyes of law.
Many people use shell companies for involving into illegal business activities without getting their identity revealed. Like for example, an individual with motive of funding terrorist or anti-national activities utilizes shell company as here their funds can’t be tracked. Also, shell corporations are used by individuals for doing business activities with unpopular client privately. Suppose, if company wants to earn profit from region or country in hidden manner and from outside want to give image of boycotting it for pleasing public can do so by using shell companies. This kind of activity can’t be called illegal but is misleading and may bring bad name to company when discovered.
Making money via Ponzi scheme
These types of corporations are often created by companies and people for making huge money out of fraudulent activities. By using such companies, people offer fraudulent schemes to general public and save themselves, as in case if fraud is caught then it is very difficult thing to find real peoples behind such schemes. The overall blame will only come on shell company that is totally of no use and does not contain anything within it.
How to Set up a Shell company
In order to complete all legalities and formalities associated with setting up of company, it is more advisable to take assistance from advisor to avoid any burden and red tape. It can be a very swift process of registering offshore company with help of field experts.
The procedure for establishing shell company is well explained in points given below: –
Selecting jurisdiction and company’s name
The name of shell company shall be chosen in accordance with trade name laws, in case, if opting for any of the particular jurisdiction. It is must to access the jurisdiction laws and regulations in order to find out optimal offshore jurisdiction that will suit your purpose. Few offshore popular jurisdictions are: Hong Kong, Singapore, Nevis, Wyoming, Panama, Belize, Delaware and Seychelles.
Appointing nominee director
Appointing nominee director is a best approach for maintaining privacy. It will help real owners in hiding their names and enjoying the actual ownership and control over company without getting identified. Nominee’s name will be used on all official documents and record of company. However, at some jurisdiction, it is also required to appoint locally registered agent but it is quite uncommon thing.
Complying with required documentation
The process of registration varies form one jurisdiction to another. But there are some standard documents required by authorities in all jurisdictions.
Such documents are a registration form, Memorandum of association, Article of association, proof of residence and identity proof along with copies of same. In addition to these mentioned documents, registration fee is also required to be submitted at office of registrar.
Apart from process of registration, a shell company can also be purchased. This will help peoples in skipping all lengthy legal formalities and straightforward utilizing an already working shell company instantly. People will be able to utilize good standing as company has already existed for some time in market thereby eventually leading to easy building of trust among public.
Availing expert services not only help companies in easy registration of shell corporations. In addition to this, they can take variety of services from their catalogue such as opening offshore bank account, bookkeeping and accounting services, etc.
Pros and Cons of Shell company
Every shell corporation carries both pros and cons for individual willing to set-up them for their respective motives.
Pros of Shell company
- Better investment option: Shell companies offer better opportunities to owner for doing investment in foreign capital market. These companies are set up in foreign country, thereby owner have access to foreign markets where they get better securities and high earning options.
- Growth: A shell corporation help business organization in their growth by limiting their legal tax burden. These corporations are set up in foreign countries having less tax regulations and provides high profit ratio. Companies by forming shell corporation can start their business in foreign land where they can enjoy lower tax rates. It will eventually result in enhancing the earning levels of company.
- Safety of identity: It is very beneficial for person willing to protect his identity from particular business. Shell corporations are created by individuals for performing criminal or illegal activities and shielding their investment value if living in dangerous area.
- Protection from lawsuit: Shell companies also help people in protecting their assets via transferring them in some another country. This will protect them from getting their asset seized and maintaining better secrecy.
Cons of Shell company
- Risky: Doing investment in shell companies carries large amount of risk as it is formed with very little information available and can be utilized for distinct operations. The investor may end up by unknowingly investing in illegal activities, thereby becoming part of crime.
- Legal issues: It is illegal to hide assets or income by investing in shell corporation. As per tax rules and regulation, hiding income for the purpose of evading tax comes under criminal penalties.
- Bad name for business: Performing business operations by company under shell corporation can bring bad name for it if get leaked among general public. Investment in shell companies, if not done in proper way may come under tax evasion and at same time, results in job loss in the home country subsidized by shell company. It will ultimately bring bad name for business enterprise in its domestic country.
- Not for everyone: Shell corporations is only meant for individuals having large amount of wealth. People working as an employees won’t be able to hide their real incomes as their employer report to tax department on earned income.