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What Is a Shell Company?

The Panama Papers leak was a global scandal. In one of the biggest data leaks in history, millions of documents revealed that banks, political leaders and wealthy individuals had allegedly hidden billions of dollars in shell companies through a Panama law firm. Reportedly, the scheme also allowed some of the firm’s clients to evade taxes. If you don’t understand what shell companies are, here’s everything you need to know.

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Shell Companies: The Basics

A shell company is a business that’s meant to hold funds and manage another entity’s financial transactions. Unlike traditional companies, shell corporations don’t hire employees. They aren’t traded on exchanges and they neither make money nor provide customers with products or services. In fact, besides keeping track of the assets inside of them (which usually don’t amount to much money), they don’t participate in any other normal business practices.

The Benefits of Shell Companies

What Is a Shell Company?

Shell companies can benefit business owners and individuals in many ways. For example, a new startup can use a shell corporation as a storage place for the money it’s raising before it officially launches its business. A company that’s preparing to go through a merger or an acquisition can save its assets in a shell company to make matters less complicated.

Corporations can use shell companies for security reasons, too, if they’re operating in regions that aren’t safe or they’re working with unpopular companies that they don’t want to be associated with. A shell company can be helpful during the estate planning process if a neutral account is needed to divide up a wealthy individual’s assets. Even someone who’s going through a nasty divorce can use a shell company as a way to shield his or her earnings from an ex-spouse.

Tax Havens

There are also tax benefits to setting up a shell company. Some countries and regions are tax havens, meaning that they are places where certain tax rates (such as income tax rates or corporate tax rates) are extremely low or nonexistent.

Foreign companies can create shell companies in tax havens like Panama and lower their tax bills at home. That’s because by law, some tax havens don’t have to report any tax information, making it possible to defer taxes and hide offshore accounts from the government. Besides Panama, other tax havens include places such as Switzerland, Hong Kong and Belize.

In most parts of the world, shell companies are considered to be perfectly legal entities. Some shell companies were once fully functioning businesses that collapsed or were eventually taken over by other corporations. But as was the case with the Panama Papers leak – which reportedly revealed the use of 214,000 shell companies – these corporations sometimes operate as illegal vehicles.

Related Article: What Is a Tax Shelter?

Illegal Shell Corporations 

What Is a Shell Company?

Shell companies are often set up to mask the identity of whoever stashes their assets within them. Normally, they have their own addresses and in the U.S., shell companies have to be officially registered with the SEC. So while they may seem like regular businesses (at least on paper), in reality they’re only shells.

If you were to try and track down information about a shell company, you would likely come into contact with the business’s managers, who are really just the company’s accountants or attorneys. It might be difficult to find out who actually owns the money inside of the shell corporation.

Occasionally, companies take advantage of the secretive nature of shell companies by participating in illegitimate activities like money laundering. Reportedly, that’s just one of the crimes that the individuals involved in the Panama Papers scandal committed. The leaked documents also revealed that the Mossack Fonseca law firm allegedly set up offshore accounts for people who wanted to avoid paying taxes.

The line between whether shell companies are being used legally or illegally can get blurry. After all, shell companies are quite common. But certain actions – like engaging in fraud, socking away money for drug dealers or collaborating with terrorists – are clearly unlawful.

Related Article: All About Offshore Banking

Final Word

Shell companies are technically legitimate businesses that are created to manage assets without necessarily revealing the identities of the funds’ owners. For around $900, almost anyone can go online and find a company to help them set up their own shell corporation abroad. That might be a good idea for some individuals, such as people who work or live outside of the U.S.

But as the Panama Papers leak reveals, the way shell companies are structured makes them perfect tools for individuals who want to take part in questionable activities.

Photo credit: ©iStock.com/GeorgeBurba, ©iStock.com/themacx, ©iStock.com/bjdlzx

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.
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