A Guide to Shell Companies: All You Need To Know
Ever wondered what shell companies are? They have a unique business structure without business operations. They are legally used by several big companies and individuals to hold assets, finances, and properties. Beyond that, shell companies are being used for some illegal acts like money laundering.
It is worth understanding what Shell Companies are, how to set up one, when you should set up, and the basic requirements for setting up. This guide therefore explores all you need to know about Shell Companies
What is a Shell Company?
A shell company is a business type formed without any business operation. They usually do not have any business infrastructure, machines, or hire employees. They are quite a popular business structure because they are used by large businesses and individuals to avoid taxes and regulations within a jurisdiction. However, Shell Company is also being used illegally to be involved in criminal acts like money laundering, contraband sales, etc.
They are often referred to as businesses that exist on paper because they do not have a physical presence. The term “Shell” expresses that the business structure doesn’t really have much inside including the fact that it doesn’t have workers, infrastructure, and a physical address.
So in most cases, owners of Shell Companies use it to hold, document, and move financial assets. No form of production of goods or rendering of services is associated with this business structure and thus the business is not usually created for revenue.
Shell Company can be used by a new business owner to hide a company or its assets from the public and law enforcement agencies. It could be used to save funds when starting a new business. To start a Shell Company in the UK, it will need to be included in the Company Register. The company owner will often use registered agents that will help in registering the business.
Even with the fact that the business structure is solely formed for the documentation or saving of business assets, they still must be registered with appropriate filings. Shell Companies can be registered anywhere but they are mostly set up in tax havens to avoid or reduce tax payment percentage.
In essence, Shell Companies are usually formed to serve a specific purpose like reducing tax obligations, keeping anonymity, holding or saving money, etc., based on an individual or a business needs. They are often referred to as phantom firms, mailbox companies, International business corporations, personal investment companies, letterbox corporations, etc.
While opening a Shell Company can be a good idea, there have been a lot of controversies in the media about the illegal use of the business structure in the UK, and other tax haven locations.
Who Uses Shell Companies?
Shell companies are used by individuals, small business owners, and large enterprises. Many of those who use Shell Companies do that to minimize tax payments and to avoid the extravagant taxes and regulations in their country. A good number of the multinational companies we know today use Shell Companies to reduce taxes. One of them is Apple Inc. which has been reported to have saved billions of dollars from tax payments just by having Shell Companies formed in Ireland. Other popular big Companies that use Shell Companies include Google, Amazon, Facebook, etc.
Many other big Individuals also use Shell Companies to avoid taxes and some use it to hide their wealth from their home country's government. So it's most common to see many public figures, big business owners, and politicians owning Shell companies.
Advantages of Setting up a Shell Company
Setting up a Shell Company comes with some benefits and drawbacks just like every other form of business. Below are the advantages of operating a Shell Company.
1. Identity Protection
Shell companies can be used as a means to ensure secrecy and protect owners’ identities in several business transactions. In a country with insecurity, opening a Shell Company could be a way to protect yourself and the company’s identity. Hiding ownership of a business can also be a good way to protect yourself from kidnappers and thieves.
2. Tax Avoidance
Using Shell companies can help many big businesses minimize taxes to the barest. In a situation where the business's home country has a huge tax structure, opening a shell company in a nearby tax haven could be a way to reduce taxes.
3. Avoiding Domestic Laws
Many companies also use Shell Companies so they can avoid some regulations and laws within their home country. These regulations could be associated with environmental safety, financial reporting, and many more. Operating a Shell Company in a country where these regulations aren’t really important would not warrant any Compliance or cost if they aren’t followed.
4. Asset Protection
Having a Shell Company could help you protect your assets both as an individual and a business. You could use Shell companies as a means to hide your assets, properties, and wealth against threats, lawsuits, or unfavourable government policies. More so, you can use it for estate planning, especially when organizing and dividing your assets.
5. Source of a Stable Capital
It is common to see many investors from several parts of the world pooling resources and capital together for future use. Because these business owners come from different countries with varying tax rules and regulations, it could quite be difficult to decide where the pooled capital stays. The use of Shell Company located in a tax haven is usually a good way to go about this. Apart from that, it could be a safer way for a single individual or business to save their money for future use.
6. Investing in Foreign Markets
Apart from the fact that Shell Companies can prevent businesses from excessive tax liability, they could be a good way to invest in foreign markets. When organizations have their investment in foreign countries as a Shell Company, they indirectly contribute to the capital market of those countries.
Disadvantages of Setting up a Shell Company
Here are the disadvantages of setting up a shell company.
1. Conducting Illegal Business
Because shell companies can be used to hide the identities of the owners, they are often used by criminals to get involved in illegal business activities. Most times, owners of shell companies cannot be easily traced. This makes it possible for them to engage in unlawful activities like trafficking.
2. Money Laundering
Money laundering activities are more common with Shell Companies than any other type of business. With Shell Company, ownership is concealed and this makes it quite easy for criminals to hide under identity protection. When criminals accumulate illegal wealth and property, they can easily hide it under Shell Company since their identity won’t be publicly known.
3. Not Suitable for Everyone
Opening a Shell Company is not for everyone. Most times it is usually formed by big businesses and wealthy individuals. In most cases, it is not usually a convenient business structure for middle-class individuals and striving businesses.
4. Affects Economic Growth
When a big business establishes a Shell Company in a tax haven to reduce tax liability, they help to improve the economy of the tax haven while depriving their home country of such development. Taxes help the government generate revenue that is used for the economy’s growth. Avoiding Taxes in your home country can influence your country's development.
Apart from these, Shell Companies can be used to hide properties from close family members or partners in business who are supposed to be aware of such property. In cases where husband and wife file for divorce, the Husband could hide his assets and properties under the Shell Company.
How to Set Up a Shell Company
Setting up a Shell Company is quite easy. Below are the steps to follow.
1. Select a Setup Location and a Company name
The first step is to choose the location where the company will be incorporated. There are many factors to consider when selecting a jurisdiction for the company formation. Check out the tax laws and regulations, requirements for setting up, and the ease of setting up.
2. Choose a nominee director
You would also need to appoint a nominee director whose name would be used on all papers and official records instead of the company owner’s name. This director nominee's name will therefore be used in the subsequent company’s transactions or dealings. This is to ensure that the anonymity and the hiding of wealth is maintained. The nominee can be the registered agent located within the jurisdiction where the company is set up. Alternatively, they can also be appointed by the registered agent.
3. Submit all the necessary documents
Paperwork will be the next thing to be done. Documents like identity copies, registration forms, articles of association, memorandum of association, and proof of residence need to be completed and filed. All of these should be accomplished with the registration fee and submitted to the relevant body.
When you are done with the above steps, you might need to open a bank account in the jurisdiction where the Shell Company is located.
Form your company with Incorpuk today
At Incorpuk, we will help you file accurate information when you register your company through us. We will help you with incorporation articles, a registered office address, and all you may need to register your company in the UK. Contact our team if you seek any information; we will gladly assist.
Frequently Asked Questions
Are Shell Companies Illegal?
Shell Companies are not illegal. However, they are sometimes used by individuals to carry out illegal activities like money laundering, illegal businesses, hiding assets from spouses during divorce cases, etc.
Are there any legal requirements to forming a Shell Company?
Yes, there are legal requirements to form a Shell Company. Generally, you would be required to select a company name and appoint a nominee director. You would also be required to file and complete the necessary documents. Every other special requirement might be dependent on the company formation location.
Is it risky to create a Shell Company?
Yes, it could be risky to create a Shell Company because of the fraudulent and illegal activities that are associated with the company structure. With this more scrutiny is done by most government bodies. Despite these many big enterprises like Amazon, Facebook still uses Shell Companies.
Conclusion
Shell Companies are not as bad as the media and public present them to be. Although, there have been many situations where criminals have used this business structure for illegal activities. However, there are also many Shell Companies out there that are abiding by rules and regulations and are maintaining the legal purpose for which the Company was created. Have any questions about shell companies? Kindly ask us here at Incorpuk and we would be glad to help.