What is a Shell Company & How is it Formed? Are They Legal?

What is a shell company?

When most people think of a shell company, they think of an illegal operation designed to hide assets or avoid taxation. But the truth is that there are plenty of legal reasons why someone might want to set up a shell company. So, what is a shell company, and how is it formed?

What is a Shell Company? Our Definition

Any shell company definition can be a little bit confusing. This is because there are several different ways you can use the term “shell company” or “shell entity.” Most commonly, though, a shell company refers to a company that doesn’t carry on any significant operations.

These companies don’t have employees, or assets of their own, and don’t carry on any actual business. In fact, they are often entirely inactive.

To some people, a shell company is a company that exists on paper only. They might think of an empty office with no furniture or employees. But a shell company can also be a legal business formed to hold the title to property or protect the owner’s identity. This is why a shell company can also be known as a holding company or a parent company.

Are Shell Companies Legal?

If no actual legal business is being conducted, are shell corporations legal? In some cases, it may be possible to set up a shell organization as a legal business.

For example, you may want to set up shell organizations for the purpose of holding the title to a property. In this case, the shell company would technically own the property and would have the legal title. However, it wouldn’t have any active business operations. It would be completely inactive. It would simply be a legal holding company.

What is the Purpose of a Shell Company?

A shell company can be used for several different reasons. But the most common purpose is to hold or protect assets. The purpose of a shell company is to provide the owner with some legal protection, such as confidentiality.

For example, an owner of a small business may choose to set up a shell company to protect their identity.

Another example of a legal shell company can take place if you want to buy an apartment building without alerting your competitors to your plans. In this case, you could set up a shell company and then transfer the title of the apartment building to the shell company. The shell company would then hold the title to the property.

How Do Shell Companies Work?

At this point, you’re probably asking, “how does a shell company work?” The simplest way to explain how shell companies work is to think of them as a type of holding company. Then what is a holding company, and how are they similar to shell organizations?

These are companies whose purposes are to hold assets. When you set up a shell company, you essentially establish a form of holding company. However, when it comes down to the differences between a shell company vs holding company, there is one big difference.

 A holding company is a company that holds assets in the form of stocks and shares from existing companies. Alternatively, shell corps are companies that are set up to hold assets, such as real estate. They are typically defined as inactive companies that are simply used as a vehicle to hold financial assets.

Shell Company Example

One typical example is investing in real estate through a shell company. This is a common way of investing in real estate for many reasons. One of the biggest reasons is that it is a way to hide your identity, which can be beneficial in some circumstances.

For example, if you are investing in real estate to earn money but do not want your name to be associated with the property, you can invest through a shell company. This can help you avoid having to disclose your identity to local competitors.

What is a Shell Corporation Legally Used For?

A shell corporation is a business most frequently used as a legal way to mask true ownership of a company. However, there are several examples of legal uses for shell corps, including:

Fund Raising for New Startups

Another common use for shell companies is to raise money for a new startup. If you are raising money for a new business, you may want to raise funds through a shell corporation instead of raising the money directly. This is often done to protect the owner’s identity. The owner will then transfer the money from the shell corporation to their personal bank account later.

Facilitate Domestic and Cross-Border Currency and Asset Transfers

Another example of the legal use of a shell company is in the field of finance. This can be especially helpful if you need a way to facilitate cross-border or domestic currency transfers. This can be useful for several reasons, including when you need to make a large purchase from a partner or supplier in a different country.

Corporate Mergers and Acquisitions

In terms of the legal uses of a shell corporation, one of the most common uses is to facilitate corporate mergers and acquisitions. This is especially common when a company is trying to buy out another company without too much public attention.

What are Shell Companies Used for Illegally?

With so many legal uses for shell corps, when are shell companies illegal in nature? The answer is simple: shell company illegal use involves committing fraud or hiding illegal activity via front companies. A few examples of illegal shell companies include:

Tax Evasion

Tax evasion is the practice of hiding income or assets to avoid paying taxes. For example, if you invest in a shell company, you can use this to avoid paying taxes on your income. In many cases, perpetrators set up offshore shell companies to avoid paying their income taxes.

An offshore shell company is not registered with the government and is not subject to taxes, so an individual may “invest” in this company to avoid paying taxes.

Money Laundering

The process of moving illegal money from one place to another to hide its true source is known as money laundering. One of the ways that you can use shell companies for money laundering is to transfer money through an offshore company as a means of hiding money.

Disguise Business Ownership from Law Enforcement

The use of shell companies to disguise business ownership from the law is one of the most common examples of illegal activity. This is often done to evade paying taxes or hide your identity should your business engage in unlawful activity.

How to Identify a Shell Company

You will need to perform a few key background checks to identify a legitimate business.

The first thing you can do is check the public records in the area where the shell company is located. This will often allow you to identify the exact address of the shell company, as well as the names and addresses of the owners.

You can also search the business name to confirm that the shell company is legitimate.

How to Start a Shell Company

Because there are several legitimate reasons to create a shell corporation, you’ll want to research and learn how to set up a shell company properly. You can start by properly registering the shell company and providing the necessary documentation and personal information. From there, you’ll want to take these steps:

  • Hire a trained registered agent
  • Provide all the necessary legal/personal information
  • Have the agent register the shell company with the U.S. Securities and Exchanges Commission
  • Hire a nominee director to handle the filing of paperwork to shield your identity

Need Help Navigating Shell Company Law?

Attempting to navigate shell company law can be quite tricky. If you don’t know what you’re doing, you can quickly find yourself dealing in some shady business. Instead, hire a trained attorney that specializes in international litigating and arbitration.

At Cueto Law Group, we are experienced in handling shell company law and providing you with the necessary guidance to protect your business.

Contact us today to find out how we can help you.

Our Key Takeaways on Shell Corporations

In today’s world, there are many different forms of business entities. Some are simple and easy to understand, while others are more complex. The topic of shell corporations is complicated, and there are many different types that you may hear about, so it’s highly advised that you reach out to a knowledgeable Florida attorney to help you understand the ins and outs of shell corps.

FAQs

What is a Shell Company Scheme?

A shell company scheme is a financial arrangement in which individuals will attempt to create offshore shell companies in order to mask their true identity from the government. Doing this enables the individual to avoid paying taxes or hide various sources of funds that the individual doesn’t want to disclose.

Can a Shell Company Own Property?

Yes, a shell company can own property. This is one of the most common reasons why people create shell companies. By creating a shell company, you can transfer the new property to the shell company to shield your personal identity and privacy when purchasing a property.

How Do Shell Companies Avoid Taxes?

There are many ways that a shell company is used to avoid paying taxes. One of the most common methods is setting up offshore shell companies in countries with favorable tax laws. For example, you can set up an international shell company in the Cayman Islands.

Which States Allow Shell Companies?

Currently, all states within the U.S. allow for the creation of shell companies. However, some states are more lenient with their rules and regulations than others. It’s worth noting that a recent provision in the National Defense Authorization Act (NDAA) may effectively ban all anonymous shell companies.

How Much Does it Cost to Open a Shell Company?

The cost of opening a shell company can vary depending on the type you are opening and who you hire to help. A person can expect to pay anywhere between a few hundred dollars to a few thousand dollars to register and open a shell company.

Cueto Law Group P.L.