The usage and prevalence of shell corporations has long plagued the headlines of many journals, newsletters and newspapers alike. For the uninitiated, however, there may still be some murkiness surrounding the term shell corporations. Hence, in this week’s edition, we will dive into the significance and usage of shell corporations, relating to how they play a role in the world of finance!
S stands for Shell Corporations!
What Is a Shell Corporation?
As the name may suggest, a shell corporation is one lacking in any function a non-shell corporation would have. In other words, shell corporations do not have any significant assets or running businesses. Furthermore, shell corporations don't deliver any goods or services to generate income, aren't publicly traded, and don't have any workers.
So how do shell firms use themselves to their advantage? Well, the usage of shell corporations can essentially be divided into two categories: legitimate and illegitimate. And while there are situations wherein shell corporations may find some use within the former category, they are, more often than not, exploited for their effectiveness in the latter.
Illegitimate Uses for Shell Corporations
In most cases, these businesses are only established to keep and transfer assets on behalf of prominent, publicly traded companies, dubious business partners, and private people.
However, it may be argued that the most common application of shell firms is as a means of tax evasion. Given that shell firms can be established, owned, and managed in entirely other nations, the existence of tax havens—certain nations known for their lax tax laws—offers a useful opportunity for tax evasion.
The Bahamas, Bermuda, the British Virgin Islands, the Cayman Islands, and Switzerland are notable examples of these tax havens where affluent individuals and businesses can set themselves up as shell companies.
A common practise among large firms is the "offshoring" or "outsourcing" of work that was formerly done domestically.
These companies do this in order to benefit from less restrictive tax laws by moving their workers and earnings there. Even if tax evasion is sometimes considered as a way around it, shell corporations have a poor reputation because of their usage in these arguably immoral and evasive schemes.
The use of shell corporations has been exposed numerous times, with the Panama Papers serving as the most prominent example, with serious repercussions.
Legitimate Uses for Shell Corporations
Although the usage of shell corporations for legitimate purposes is noticeably less prevalent than their usage for illegitimate purposes, they still exist. Notably, shell businesses can be used as a startup's vehicle for raising capital, going public, or carrying out a hostile takeover of another company.
Shell businesses can also occasionally be nothing more than the ruins of a company that has ceased operations or had all of its assets acquired by another business in the course of a merger or acquisition. American enterprises, for instance, will establish shell companies in the other nations where they are outsourcing jobs to stay inside international legal limitations.
That being said, despite the fact that it is legal, some people may view this as an unethical activity.
Another school of thought contends that domestic businesses are being compelled to establish shell firms abroad by the U.S. tax code.
Nevertheless, given their ability to create bank accounts, conduct financial operations, purchase real estate, and amass copyrights and royalties, shell organizations can certainly be employed lawfully.
Even if it is initially through a shell organization, someone can utilize these capabilities to collect and hold the money they need to establish a new business before the new company is registered. Last but not least, shell firms can be utilized to invest in overseas markets because doing so is made simpler by holding a business in a foreign nation.
That’s all for this week’s article. Thank you for reading, and see you next time!