When one hears the term “shell company” or “shell corporation,” many think of spy thrillers or a front for an evil corporation in a movie. In reality, these shell companies are used by many—especially small and mid-sized business owners—to help them access the public market and safeguard intangible assets. While these corporations can be used for grey and black market transactions, they go through a registration and monitoring process by the U.S. Securities and Exchanges Commission (SEC), making them significantly less mysterious and nefarious than most people believe.
What is a Shell Corporation?
A shell corporation is a corporation that exists in name only. While all are registered financial entities, usually as limited liability companies (LLCs) or trusts, physical assets usually only include a P.O. Box. Besides little or no tangible assets, shell companies usually have little or no operations. Technically startup firms that file with the SEC are shell companies until they start operations and assign assets. Internet startup companies in particular can remain as shell companies for part or all of their existence.
Not a Shell Game: Legitimate Uses
Shell companies have a long and checkered past in both the grey and black markets. By such immoral individuals or corporations, they are used in obfuscation—primarily confusing the origin of assets, such as in the case of money laundering. The SEC monitors and prosecutes such companies, leaving alone shell companies that have legitimate uses like those below.
Known as a reverse merger (we’ve talked about them before), a company acquires the stock of a shell company that has gone public. This shell has been created by the company or a third party for the express purpose of merging this public shell into the primary business, allowing them to go public as well. By not having to perform an initial public offering (IPO), the company saves time and money.
While many shell companies don’t have any assets, they can be used to transfer or safeguard them. Personal assets such as copyrights and royalties can be transferred to shells, protecting them from litigation. They can also act as a third-party buffer between wary companies for the transfer of assets such as intellectual property.
While we think of shell corporations as tools only for big business, some of those who benefit the most are individuals. Many business expenses that are not deductible by an individual can be deducted by a shell corporation that the person creates and owns.
Sometimes companies halt operations and sell or transfer assets due to poor market conditions or mismanagement. These corporations are then left as shell corporations until market conditions change or assets are reinvested into the company, or even sold to third parties for use in reverse mergers if the company has gone public.
We hope you found this article useful in debunking the common misconceptions that surround shell companies, as well as how they can be a legal asset to your person or company. If you have additional questions about shell companies, or how to gain the use of one, please contact George & Company today. Having an M&A adviser can help you not only set up and use one correctly, but also how to avoid mismanagement that can create liabilities and damage your reputation.