What Is a Shell Company? Definition and Meaning

The Panama Papers leak was a worldwide scandal. Millions of documents were leaked in one of the largest data dumps in history, revealing that banks, political officials, and wealthy individuals had reportedly hidden billions of dollars in shell companies via a Panama legal company. According to reports, the technique also permitted some of the firm’s clients to avoid paying taxes. If you’re not sure what shell businesses are, here’s all you need to know.

The fundamentals of a shell company

A shell corporation is a business formed to keep funds and manage the financial activities of another entity. Shell firms, unlike typical businesses, do not have workers and are not sold on exchanges. Shell companies don’t make any money and don’t give any goods or services to their customers. In fact, the only normal business procedure that shell corporations engage in is keeping track of the assets they own — which usually do not amount to much money.

The advantages of a shell company

Shell businesses can help business owners and people in a variety of ways. A new firm, for example, can employ a shell company to house the funds it is generating before publicly launching. To simplify matters, a company that is planning a merger or acquisition can save its assets in a shell company.

Corporations can also use shell companies for security purposes. For example, if a corporation is operating in a risky zone or collaborating with an undesirable company with whom it does not want to be linked, it may establish a shell company. Even in a divorce situation, you put your assets in a shell company. This will prevent your ex-spouse from having a claim to those assets owned by the shell company.

Shell companies in tax havens

Some countries and regions are tax havens, which means that certain tax rates (such as income tax rates or corporate tax rates) are extraordinarily low or nonexistent.

Foreign corporations can set up shell firms in tax havens like Panama to reduce their tax costs back home. Because some tax havens are not required by law to provide any tax information, it is possible to postpone taxes and conceal offshore accounts from the authorities. Other tax havens, in addition to Panama, include Switzerland, Hong Kong, and Belize.

Shell businesses are considered entirely legal entities in most parts of the world. However in some circumstances, shell companies were once fully functional enterprises that failed. They might also be taken over by other entities. However, as the Panama Papers leak demonstrated, shell companies can occasionally be used as unlawful vehicles.

Shell companies that are not legal

Shell corporations are frequently put up to conceal the identity of whoever hides their assets within them. Therefore they usually have their own addresses. Shell companies in the United States must register with the Securities and Exchange Commission (SEC). So, while they may appear to be ordinary firms (at least on paper), they are only shells.

If you tried to find out information about a shell company, you would most likely come into contact with the firm’s managers, who are really merely the company’s accountants or attorneys. It may be difficult to determine who actually owns the money contained within the shell corporation.

Firms may take advantage of the secrecy of shell companies to engage in illegal activities such as money laundering. According to reports, this is only one of the crimes committed by those implicated in the Panama Papers controversy. The released documents also revealed that the Mossack Fonseca law company reportedly set up offshore accounts for people who sought to avoid paying taxes.

Image source: BSmedia

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