What is a Shell Company and What is it Used For?

Just the words “shell company,” create images of corruption, hiding assets, and furtive secretive motives. That’s largely from the movies and TV. While shell companies can, and have been, used to skirt the law, in reality and most of the time, shell companies have a legitimate business purpose.

Why Use Shell Companies?

Shell companies, often called holding companies, exist for the sole purpose of holding an asset. The company itself doesn’t actually do any type of business. Often, shell companies are used to hide the true owners of assets, or to hide the identities of businesses that own the shall companies.

Shell or holding companies can hold (and hide) an interest in a business, for example, shares in a company. Or, they can hold physical assets, like real estate or machinery or inventory.

When Secrecy Matters

Why would you need a shell company to hide who you are, or to conceal property that you or your company own?

Imagine that you purchased property that has to do with a larger business deal. But you don’t want your competitors to find out, and get a leg up on you. Putting those assets in a shell company can help hide your intentions from those competitors.

In some cases, you, personally, may not want people to know that you own a business, if anonymity is important to you. The business or its property may be held in a shell company.

You may be working on a business deal, which requires that money or property or some kind of transaction, be passed to another party—but you don’t want to alert the world that you are thinking of engaging in the proposed business deal.

You may want to start raising money for a new startup company, which will be transferred to the actual company once it actually starts up.

If your company is well known, you may want to consider a merger or an acquisition of another company, without the merger making any news or headlines. A merger of two unknown shell companies can get that done secretly.

Illegal Uses

Yes, there are illegal uses of shell companies also. Most of the illegal uses are things that you hopefully wouldn’t consider doing anyway. Things like money laundering, or hiding illegal activities from law enforcement, as well as anything to defraud the IRS or the state when it comes to taxes, are the main ways that holding companies can be abused.

Avoiding Liability

There are some instances where companies do business in a transaction with the shell company, in order to avoid potential liability from the actual business that owns the shell company.

This isn’t necessarily illegal. But it is also not necessarily effective; if the “main” business owns the shell company, the other side could still try to reach your main company in any lawsuit, even though it is the shell company’s name on contracts or transaction documents involved in the lawsuit.

Questions about running your company or managing its assets? Call the West Palm Beach business litigation attorney at Pike & Lustig today.