If you’re looking for a guide to shell corporations, then this this the blog for you. There’s a lot to know from a legal standpoint, and we’ll spend some time here sorting through best practices for shell corporations. As business formation lawyers, we can also look at various other legal options for the structure of your business.
A shell corporation is a business entity that does not have substantial assets or active operations. Generally speaking, a shell corporation is a legal tool used in different business transactions to reduce tax liability, to access financing, to store funds, or to maintain anonymity. On the other hand, a holding company is a parent company – often to many different businesses. A holding company does not engage in the operations of the held companies but instead maintains enough stock to control the held companies. This can reduce risk for owners while still being able to own and control numerous businesses.
Purchasing or selling a business may seem as simple as transferring assets and ownership from one company to another. However, these transactions can be significantly more complicated than that and may have unexpected civil or tax liability, as well as other costly implications. Holding companies and shell corporations are two tools that can be used to avoid the potential liability of a traditional sale, as well as to ensure anonymity if needed or to facilitate a hostile takeover. An experienced Houston business transactions attorney can identify when a holding company or shell corporation can help you achieve your goals in your sales transaction. If you’d like to discuss this in greater detail, feel free to call our business attorneys at 713-666-1981.
What Is a Shell Company Used For?
Despite its name, a shell company is a legal tool more than what you might typically think of as a “company.” It has no storefront, no assets and is not involved in any daily operations of a business. As a legal tool, shell companies can be set up to achieve the following:
- Access financing
- Reduce tax liability
- Store funds
- Maintain anonymity
- Conduct a corporate takeover
- Take a company public.
As you can see, these are often financial objectives. Sometimes shell companies are also used by domestic businesses to realize a tax haven abroad, taking advantage of looser tax codes in various other countries. This is particularly true if work is being offshored. A shell company can also enable a domestic company to invest in capital markets outside the United States and conduct financial activity in foreign markets. By doing so, a company can realize potential tax savings. A tax haven is a foreign country that allows non-residents little or no tax liability in a politically and economically stable environment. A “tax shelter” is a vehicle used by taxpayers to minimize or decrease their taxable incomes and, therefore, tax liabilities.
The importance of having a trusted and experienced business lawyer is paramount when creating these finely tuned legal instruments, because businesses want to leverage the legal opportunities available to them while still maintaining the integrity of their enterprises. Attorney Andrew Weisblatt works hand in hand with corporate leaders to explain the legal details of their business options and implement those options that make the most sense for each individual client’s unique set of needs. Our firm’s focus is on creating customized legal and business solutions for every client. Because no two businesses are alike, there is no “one size fits all” legal solution for everybody.
A Shell Parent Company Explained
A shell parent company exists only on paper and has no offices, no employees and no physical headquarters in the typical sense of the term. However, it can have a bank account and passively hold investments. It can also be the registered owner of assets such as ships or intellectual property. Shell companies are often registered to the address of a different firm or company whose purpose is providing services to shell companies, including receipt of legal correspondence. Such firms can include lawyers and accountants.
Also, a shell parent company can act as trustee for a trust. In this role, it’s possible that it would not engage in any other activity on its own account. Again, it is simply a legal tool to accomplish a greater purpose. The structure creates limited liability for the trustee. A corporate shell can be created around a partnership to protect partners and limit their liability. A shell parent company can also immunize one part of a business from the risks of another part of the business.
In another way, shell parent companies are a tool that can be used to transfer financial and physical assets from one company into a new company while leaving the negative liabilities in the previous company.
The U.S. Securities and Exchange Commission defines a “shell” company as follows:
‘Shell company: The term shell company means a registrant, other than an asset-backed issuer as defined in Item 1101(b) of Regulation AB (§ 229.1101(b) of this chapter), that has:
(1) No or nominal operations; and
(i) No or nominal assets;
(ii) Assets consisting solely of cash and cash equivalents; or
(iii) Assets consisting of any amount of cash and cash equivalents and nominal other assets.
Holding Company vs. Shell Corporation
A holding company is a corporation that owns stock in other companies. Its primary purpose is to hold shares of stock in other companies so that it can control these companies. However, a holding company does not engage in the daily operations of the held companies. Very large holding companies can control multiple individual companies.
On the other hand, a shell corporation is a business entity that is not actively engaged in business and holds no or few assets. Unlike a holding company, it does not hold or control other individual companies. A shell corporation is a legal tool used to create tax advantages, access financing and store funds, among other things. It is also an effective tool if owners want to maintain anonymity.
If you’re looking for business start-up information, Texas employer and tax data or guides and resources about launching a business, you can find more information here.
Various other legal structures for a business are defined and explained by the Texas Secretary of State’s office here. We recognize that some of this can get pretty technical, so if you have questions, feel free to call Weisblatt Law Firm at 713-666-1981.
Reasons to Create a Shell Corporation
If you are engaged in a business transaction, a skilled attorney can discuss the possible benefits of a holding company or shell corporation in your particular situation. First, you need to decide what your specific objectives for the business transaction are. If your goals require any of the following, a shell corporation may be useful:
- Foreign investments
- Tax havens
- Hostile takeovers
- Temporary fund storage
- Anonymity for public relations or security purposes
- Asset protection from lawsuits.
A holding company may help increase management efficiency, centralize expenses and operational control, lower capital costs, better lending rates and more, because of a greater strength of the holding company than that of the individual subsidiaries.
If your goals include maintaining control over many different companies through a variety of transactions, a holding company will likely be beneficial in many different ways. On the other hand, if your goals involve a single transaction, you may want to divert that transaction through a shell corporation if the purchase is hostile or risky.
There are many mergers and acquisitions that involve neither a shell corporation nor a holding company. However, it is important to have your qualified business lawyer review your situation for any unique circumstances that may require the use of creative legal tools.
Find Out How Our Houston Business Law Firm Can Assist You
The Weisblatt Law Firm is highly focused on business law rather than being a generalized law firm. Attorney Andrew Weisblatt has spent years as both in-house counsel for corporations and as an outside law firm attorney who counsels and acts on behalf of business leaders and executives. Because of his unique background, he understands both the overarching leadership objectives of executives and the highly technical aspects of business law.
Whether you are starting, purchasing, or selling a business, or need legal support for regular operations, our business attorneys at The Weisblatt Law Firm can assist you. We can help with everyday operational and compliance matters, as well as highly complex mergers and acquisitions that involve tools such as shell corporations or holding companies. We strive to achieve the goals of each and every client and can help companies of all shapes and sizes. Please contact our office for more information about our services at 713-352-0847 today.