The recent release of the Panama Papers has led to a lot of questions about shell companies. The term "shell company" often brings the thought of shady characters looking to hide assets from the IRS. In reality, these business devices can be a handy and legal way to achieve a number of goals.
Just what is a shell company? A shell company is, essentially, a business that is not actively trading or engaging in commerce. A recent article in Accounting Today discussed these business entities, noting a more accurate term would be "single-purpose entity".
What can a shell company be used for? Shell companies can serve a number of purposes. Three of the more common, legal uses of shell companies include:
- Starting up a company. It is not uncommon for novice entrepreneurs to begin their careers by setting a company that only exists on paper. Some may have no capital at all. Others may exist not to actively conduct business, but for the sole purpose of protecting intellectual property. This later can be true for both starting a business and preserving a growing venture.
- Protecting against liability. This business structure is one that is often used to avoid liability. The piece in Accounting Today elaborated on this use by discussing the basic structure of a Fortune 500 company. These companies may appear to be one, single entity. In reality, they are often a number of individual business entities stacked together. This allows the company to shield itself from liability. If something were to go wrong in one branch, the entire company would not be liable. Only that one, smaller portion.
- Avoiding probate. Probate is the court process that is used to distribute assets. Those who wish to avoid this process have many options, one of which is to put together a shell company to "own" the assets. This can provide the owner with a greater level of control that if he or she were to defer to state rules on the transfer of assets.
When properly structured and used in the right situation, these single-purpose entities aren't just legal, but beneficial.