Are Shell Corporations Illegal?

The laws governing corporations are very complicated. For the most part, each state has its own set of laws the deal with the formation and operation of a corporation. Additionally, there are federal laws that apply to certain corporations, especially larger corporations with interstate and international operations.

You might have heard of the term “shell corporation” in a movie or on television. Shell corporations have been associated with somewhat illegitimate businesses. This article explains the nature of a shell corporation and explains whether shell corporations can be legitimate or are illegal.

What Is a Shell Corporation?

A shell corporation is an entity that exists primarily on paper. Where active companies organized as corporations typically have a board of directors, corporate officers, employees, and substantial corporate assets, a shell corporation essentially exists solely on paper. Federal law has a definition for “shell company.”

Under Rule 12b-2 of the federal regulations issued under the U.S. Securities Exchange Act of 1934, a shell company is defined as one that has little-to-no business operations and either:

  • Little-to-no assets
  • Only cash and cash equivalents as assets
  • A mix of cash or cash equivalents and other nominal assets

Because corporations typically shield their owners from liability for the acts of the corporation, other companies usually form a shell corporation for certain transactions and the use of specific assets to minimize their liability for issues arising from the asset’s use. For example, a corporation might establish holding companies to protect their intellectual property and trade secrets. Also, a family might want to establish a shell company to preserve family assets as part of a comprehensive estate plan.

Many corporations are incorporated in Delaware even though their headquarters and operations are based throughout the country in different states. That is because Delaware is known as a corporation-friendly state. Under Delaware law, a corporation may be formed for any purpose that doesn’t violate the law. Many other state laws allow corporations to exist for broad purposes like this.  As a result, corporations can be formed for any reason, as long as that reason isn’t illegal.

Ultimately the law does recognize a legitimate place for shell corporations, given the benefits of limited liability that a corporation or limited liability company provides. However, the benefits a shell corporation provide are also utilized as part of an illegal scheme or criminal plot.

Illegal Uses of Shell Corporations

Shell companies may not be used to help people evade paying taxes or to launder money from a criminal enterprise. For tax evasion purposes, the property and money that would otherwise be subject to state and federal taxes could be held in a shell company that was established in a country where those companies or its assets are subject to little-to-no tax consequences. Furthermore, tax haven countries do not share information with U.S. tax authorities. Because an offshore corporation holds what would have been taxable assets, they won’t count toward a person’s income and assets for tax purposes.

One should be careful about companies based in the following tax haven countries:

  • Andorra
  • The British Virgin Islands
  • The Cayman Islands
  • Hong Kong
  • Monaco

Money laundering also relies heavily on the use of shell companies. Money laundering is the process of disguising or otherwise obscuring the source of money. This process is useful for money that was obtained using unlawful or criminal methods. An overseas shell company can be established to receive illicit funds. That shell company may enter into a series of transactions with other shell companies, making it difficult for law enforcement to track the source of funds. Federal and state laws have criminalized money laundering.

Get Quality Legal Advice from Scaringi Law Today

Running a legitimate business can be difficult. Many of the tools and methods that major companies use and employ can involve the use complicated techniques, like the establishment of a corporate structured based on shell companies. These methods may seem shady, but to benefit from their legitimate use, it is important to consult a skilled attorney from Scaringi Law. We can advise you on the appropriateness of certain business tactics and strategies, especially their limitations as a legitimate use.

To learn more about how Scaringi Law can help your business, call us at (717) 775-7195 or contact us online today.


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