Virtually all companies have employees and provide either goods or services to the public. However, this is not the case with shell companies. The primary goal of shell companies is to manage funds on behalf of another company, which typically does have employees and does offer something to customers.
While it is legal to create a shell company, they can also be used to commit crimes – so it’s important to understand how to operate such a company legally.
Legal applications of shell companies
Many legitimate start-ups use shell corporations to store their financial holdings before their business is officially launched. Shell companies can also be used to preserve a business’s reputation. For instance, when working with another company with an unfavourable reputation, a shell corporation may be created so that a business is not subject to an unfavourable association as a result.
A slightly less ethical – yet not necessarily illegal – practice is to create a shell company as a tax haven. In this case, a company would open a shell corporation in a country where it is not obligated to make tax disclosures, such as Switzerland. This allows the company to keep their tax bills low, no matter how much money it is earning. Tax havens can easily veer into illegal territory, however, at which point the shell corporation would be in violation of the law.
When shell companies are illegal
It can be difficult to determine who actually owns a shell company, as the owners are often represented by managers or financial officers. Additionally, the physical location of a shell corporation may not provide much insight into who owns it or which actual business it is linked to.
Because it can be so difficult to find out information about these companies, they can sometimes be used for illegal purposes. This includes tax evasion, money laundering, fraud and other nefarious activities.
While shell companies have a reputation of being linked to illicit business activities, such company structures are not inherently bad. If you’re interested in setting up a shell company for your business, an experienced business lawyer can guide you through how to achieve this in a way that protects you and your business.