In 2016, the Panama Papers connected politicians, business people, and the super wealthy to hundreds of thousands of offshore accounts and shell companies.
Often associated with illegal activity, establishing a shell company is completely legal. And while it can be used in illegal ways, there are many legitimate reasons for having a shell company.
Whether you’re starting a new company and need a place to temporary store funds or looking for ways to invest in foreign markets, a shell company can facilitate that. Knowing how they function and when to use one is the first step in protecting your assets.
Keep reading to learn what an offshore shell company is and how to find one.
What Is a Shell Company?
Shell corporations also go by the names phantom firms, mailbox companies, personal investment companies, international business corporations, or letter-box corporations. What they all have in common is that they maintain the anonymity of the owners and the business assets.
The main purpose of a shell company is to legally protect assets. A shell company doesn’t conduct any actual business. That is, they aren’t involved in product development or manufacturing, they don’t hire employees, and they don’t generate revenue.
What they do is engage in financial transactions and/or store money. A shell company has the legal right to open bank accounts and move funds between those accounts. They can also be involved in real estate purchases and sales, own copyrights, and collect royalties.
All of these activities can be done without the identities of the owners being revealed. There are very few ways to reveal the beneficial ownership of a shell company.
Where To Find Shell Corporations
Shell corporations can be used to avoid paying taxes in the US. When a business moves offshore, they don’t have to pay taxes on their assets in the US. This is called wealth defense, and it allows owners of shell corporations to take advantage of lower tax rates in other countries.
Because the most common reason for a shell company is to avoid paying taxes, they’re usually set up in tax havens. A tax haven is a country that has little regulating in terms of banking. They usually have lower taxes, laws for protecting the banking information and identities, as well as access to foreign markets.
Contrary to popular belief, this is a legal practice. As long as the assets held by the shell corporation were earned in the country it’s being held, owners of a shell company aren’t breaking the law. Taxes aren’t applicable to those funds until they come back onshore.
Registering a Shell Company
An offshore shell company has to register with the country in which it’s located for it to be legal. To handle the administrative process, many corporations higher a registered agent to set up their shell company. They handle the paperwork, are well versed in the bureaucratic process, and take care of registering the nominal owner on behalf of the corporation owners.
The cost to register a shell company will vary depending on the country in which it’s located. In some countries, this is as little as a few thousand dollars while others cost in the six-figure range.
Knowing Why You Use a Shell Company
Shell companies get a bad reputation because they can be used for illegal purposes. Some people set up shell corporations in order to money launder or hide ill-begotten gains.
But there are many other reasons you might set up a shell company, all of which are legitimate and perfectly legal. Below, we detail some uses for a shell company that fit that description. Knowing why you would use a shell company can help you choose one that’s right for your purposes.
If you were starting a new company and needed a place to store your funds, you might consider opening a shell company. This will protect those funds and ensure you’re not paying taxes on something that’s not yet earning any profit.
Protect Assets from Economic Conditions
People who live in countries with volatile economic conditions might protect their assets in a shell company.
Protect Assets from Corrupt Government
In countries with unstable or corrupt governments, people may wish to protect their assets from being seized unfairly. In countries that don’t have legal protection from their assets being seized, businesses and citizens may hide their assets in a shell company.
Setting up an Initial Public Offering (IPO) is a troublesome process. To avoid having to go through it, some investors will purchase a publicly traded company that hasn’t been active for many years. This is called a reverse merger and it’s another legitimate reason to acquire a shell company.
Corporations often conduct business across many countries. Each of those countries has its own tax and business laws as well as currencies.
With a shell company, investors can pool their capital and it’s subject to the same laws and regulations. This creates a stable entity from which to conduct financial investments.
Some people need to establish shell companies in order to protect their assets from criminal activity. Wealthy people and business owners from dangerous countries may be targeted by kidnappers, thieves, and con artists. A shell company keeps at least a portion of their assets safe from criminals.
More On Your Money
Although they’re often viewed as a negative thing, shell companies aren’t only used to hide and launder money for criminal purposes. They can be used for many legitimate purposes. This includes protecting assets from economic volatility or corrupt governments as well as storing money for a startup.
Usually created in tax havens, a shell company must be registered in the country it’s located. As long as the money it holds was made in that country, this practice is completely legal.
And for more business advice and information, check out our business blog.