Shelf Companies vs Shell Companies: 4 Things You Should Be Aware Of
What is the difference between a Shell or Shelf company? Are they always illegal? Read this article to find how they differ legally and structurally.
Shelf Companies and Shell Companies are both types of corporations that have not been active since registration. Both are known as companies big corporations use for tax minimisation and sometimes, illegal activity.
However, Shelf and Shell companies are not illegal themselves. Their ‘illegality’ depends on their purpose. Both Shelf and Shell companies have different purposes and structures and should not be confused with one another.
Shelf company is just a normal company that remains unused. They are inactive simply because no one is trading under that business. You can buy these companies and conduct business through them.
Shell companies are non-publicly traded or limited liability companies or trusts. Larger corporations create them to carry out other activities like holding shares or assets offshore. This is why they do not actively trade or have significant assets.
How are they acquired?
You have to follow all regulations and requirements to create a Sehlf Company. They can be corporations that have previously been used and are now dormant, waiting for a new purchaser. Shelf companies generally have a clean legal and financial history.
Once the purchaser buys the company, there is a lot of administration work that needs to be completed. This includes appointing new directors, transferring shares, changing the address and changing the name.
If you would like more information on selling or buying a company, contact a Business Purchase and Sales Lawyer today!
You must also create a Shell Company according to certain rules. However, there are not many rules and they don’t require a lot of information. Generally, all you would need is to nominate a director and provide an ID for verification and pay the fee. There is no need to have a place of business or have employees.
Common Legitimate Uses
- Shelf companies were used to avoid having to register a new company as it was a lengthy process. However, registering a company won’t take you more than 10 minutes these days.
- Shelf companies are advantageous when applying for a loan or bidding for a contract. This is because a shelf company exists many years before you buy it and so appears to have been in the market for longer, creating legitimacy.
- It also helps businesses start selling their products or services immediately because they do not appear as a new entity to prospective customers.
- Shell companies help hold intangible assets or shares.
- They can be useful when carrying out over-seas transactions. For example, you can use a shell company to organise a multi-national deal in one jurisdiction.
- They are a legal way of outsourcing work to countries with more lenient tax laws.
- They allow business to invest and engage in financial markets overseas.
Where does it get illegal?
Both shelf companies and shell companies can be used for illegal purposes.
Shelf companies can make their purchaser appear to have admirable business attributes such as stability, legitimacy and a great credit score. Buying a shelf company can allow fraudulent business to mislead customers.
Since the Panama Papers leak and the recent Paradise Papers leak, Shelf companies have a notorious reputation for being a tool to evade tax.
Illegitimising a shell company is actually quite easy because:
- The company’s jurisdiction has lenient tax laws.
- The creator of the company never has to reveal themselves. They can always use a nominee director and have their lawyer or account provide verification
- It is hard to identify them unless there is suspicious activity.
Because of the anonymity it offers, Shell Corporations are often used for illegitimate purposes like money laundering and tax evasion.
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Naga Vamaraju is a legal intern at Lawpath as a part of the Content Writing team. She is in her final year of a Bachelor of Arts (Psychology) and Bachelor of Law Degree. She has a particular interest in the law surrounding starting and operating a business.