What Is a Shell Corporation?

A shell corporation is a company with financial assets but no significant business activity. Shell corporations don't create products, hire employees, or generate revenue. Rather, they store money and engage in financial transactions. Shell corporations can be used for illegal purposes like money laundering or legitimate purposes like storing funds in the early stages of a startup.

Shell corporations may also be known as international business corporations, personal investment companies, phantom firms, mailbox companies, or letter-box corporations.

How Does a Shell Corporation Work?

Shell corporations hide the identities of their owners. They can be set up anonymously, letting businesses and individuals engage in financial dealings without revealing who they are.

Shell corporations are often created in tax havens. Tax havens are countries with few or no taxes on business, as well as laws against revealing banking information. By starting a shell company in a tax haven, a business can enjoy lower taxes and access to foreign markets.

A shell corporation can:

  • Open bank accounts and move funds.
  • Engage in financial transactions.
  • Buy real estate.
  • Own copyrights and collect royalties.

How Are Shell Corporations Used?

The most common use for a shell company is to avoid taxes. This is known as tax avoidance or wealth defense. Companies offshore, or move part of their operations to another country, to take advantage of lower taxes and less regulation. As long as money held in a tax haven was earned in that country, this practice is legal.

Offshoring isn't the only legal use for a shell corporation. Other reasons for a shell company are to:

  • Stage a hostile takeover. A hostile takeover is when one company buys another without the approval of the target company's management.
  • Hold money temporarily. For instance, you might use a shell company to store funds while you're preparing to start a new company.
  • Go public with a reverse merger. A reverse mergerl ets a private company become publicly traded through a process easier than an initial public offering (IPO).
  • Invest in foreign markets.
  • Hide dealings between two companies. A company may want to hide its work with a business that has a poor reputation.
  • Protect assets from lawsuits.
  • Hide your identity for safety. People in dangerous countries may hide money to avoid being targeted by criminals.

How are Shell Companies Set Up?

A shell corporation must register with the company register of the country it's created in. U.S. shell companies register with the U.S. Securities and Exchanges Commission.

Agencies known as registered agents set up shell corporations. These agents file paperwork and send fees to the company register on a business' behalf. Shell companies can register online or by phone, and fees range from a couple hundred to a few thousand dollars. These facts make them easy and cheap to create.

Registering a shell corporation requires little personal information. Often only the identities of the registered agent and the beneficial owner are needed. To mask ownership, a company can hire people known as nominee directors to file the paperwork under their name.

For even more anonymity, a shell corporation can register as a subsidiary of another shell corporation. This means that the shell company is officially owned by another shell corporation. Shell corporations can repeatedly layer in this way to create a high level of secrecy. When each subsidiary shell is in a different country, the owner is protected from investigation by any one country.

Shell corporations can be created anywhere, but some places are more popular than others. Popular tax havens include:

  • Switzerland 

Economist Gabriel Zucman estimates that 60 percent of the money in Swiss bank accounts belongs to shell corporations.

  • Cayman Islands
  • British Virgin Islands
  • Bermuda
  • Jersey
  • Luxembourg
  • Bahamas
  • United States

Delaware, Nevada, and Wyoming are the most popular states for creating a shell company due to lax incorporation requirements and strict privacy laws.

According to the research group Global Financial Integrity, the U.S. is the second easiest country to create a shell corporation in. With a U.S. shell company, foreigners can access the U.S. real estate market. In fact, a large amount of real estate in major U.S. cities is owned by shell corporations.

Reasons to Consider a Shell Corporation

Creating a shell corporation could be a good decision for a business looking to grow its operations while limiting its tax burden. By operating in a country with low tax rates, a business can reach new markets and increase profits.

Even if you don't plan to operate in a foreign country, you may want to set up a shell company to invest in foreign markets like stock and securities exchanges.

Individuals may create shell corporations to protect assets from lawsuits. If the shell company is in a country that doesn't enforce U.S. legal rulings, its funds cannot be seized. However, this practice is only legal if all required U.S. taxes are paid.

Reasons Not to Consider a Shell Corporation

Shell corporations can be a risky choice depending on your plans for them.

Although using shell corporations to offshore operations can be a good business move, it can also lead to bad publicity. Public opinion generally frowns upon moving jobs and profits out of the U.S. If customers find out about your shell corporation, you could see sales drop stateside.

While not necessarily illegal, using a shell company to hold personal assets exists in a legal gray area. Any income earned in the U.S. is subject to U.S. taxes. Hiding income from the IRS could result in civil or criminal penalties if discovered. The U.S. has increased regulation of tax evasion by requiring foreign banks to provide information on accounts held by U.S. citizens.

Storing personal assets in a shell company also only makes sense for people with a large amount of wealth from investments. Since employers report the income they pay employees to the IRS, earned income can't be hidden.

When considering a shell corporation, it's important to remember that anonymity isn't fail-safe. The Panama Papers scandal, for example, leaked over 11 million documents that revealed the owners of shell companies registered by the Panamanian law firm Mossack Fonseca. The Panama Papers implicated a number of government officials and public figures in crimes ranging from tax evasion to money laundering.

Frequently Asked Questions

  • Are shell corporations illegal?

Shell corporations aren't illegal, but they are sometimes used for illegal activities, including:

  • Laundering money. A shell company can hide the source of money obtained illegally.
  • Evading taxes. Wealthy people may hide money in shell corporation to shield it from taxation.
  • Engaging in illegal business. Examples include the arms or drugs trade.
  • Hiding assets from a spouse in a divorce. This is a type of fraud.

Talk to an Attorney

If you want to find out if a shell corporation is right for your business, talk with an experienced UpCounsel attorney to make sure you stay on the right side of the law. Click here to post on UpCounsel's marketplace of experienced business lawyers where you can find a top attorney with the exact expertise your business needs. UpCounsel only accepts the top 5% of lawyers from schools such as Harvard Law and Yale Law. UpCounsel lawyers have worked with or on behalf of companies like Google, Stripe, and Twilio.