What’s the Difference Between a Shell Company and a Holding Company?
Thinking of a strategic business structure? Find out about two company types here.
Both shell companies and holding companies share similar traits. However, each have their own distinct function and purpose. In this article we will briefly overview the characteristics of a shell company and a holding company, and how their functions are different.
A shell company is a company that does not operate as what most would consider a normal business per se. It does not have business operations, employees or even a physical office. They don’t make money nor provide products or services to customers. Instead it often owns assets in one or more companies, and acts as an inactive company.
The use of a shell company varies, however, generally it is used for various financial manoeuvres or is kept dormant for future use. Shell companies also have a notorious reputation for operating as an illegal vehicle for tax evasion and money laundering.
Are shell companies legal?
Shell companies are not necessarily illegal. However, reports discovered that a number of shell companies operate as illegal vehicles. In early 2016, a leak of the Panama Papers uncovered Panamanian law firm, Mossack Fonseca, for burying financial information about the wealthy and public officials. Reporters found that some of Mossack Fonseca’s shell companies operated illegally to conduct criminal activities such as fraud, tax evasion, and evade international sanctions.
Additionally, in early 2017, the Paradise Papers leak (the largest of its kind in history) revealed the inner workings of the tax haven industry. It revealed the financial affairs of various global leaders and officials.
Although shell companies have received a bad reputation, there are legitimate reasons to start a shell company. Startups often use them as a business entity to raise and secure funds and open operate at a later date. They also:
- Operate for privacy reasons to secure assets such as intellectual property.
- Limit liability for companies.
Similarly, a holding company is not an active business itself and does not have any operations. It also owns assets in one or more companies. However, a holding company is a parent company that owns shares from another company to control its policies and management.
The purpose of a holding company is often to organise, oversee and manage a group of companies. It usually has the power to hire and terminate managers and directors from its subsidiaries. However, its function allows managers to be responsible for their subsidiary in its day-to-day operations. Akin to a shell company, a holding company can also do nothing more than to lend, hold and borrow assets such as real estate, trademarks and patents.
Both shell companies and holding companies share the below characteristics, they:
- Do not have usual business operations such as selling products or services to customers.
- Do not have a physical office with employees.
- Hold assets such as intellectual property from one or more companies.
However, shell companies and holding companies have entirely different purposes:
- Shell companies are used for financial manoeuvres such as receiving tax benefits or to hold assets until the company becomes active.
- Holding companies are used to manage the policies and management of a group of companies.
When considering either company structure it is essential to speak to a corporate lawyer. If you are considering to start a shell company speaking to a tax lawyer will also be beneficial if you are considering it for tax benefits.
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Chris is a legal intern at Lawpath, and is currently studying a Bachelor of Laws at Macquarie University. He is interested in commercial and IT law.