What is a shell company?

Shell companies are often associated with money laundering, tax evasion, and other shady business dealings. We’ve all seen that movie narrative, where a villainous Mr. Money Bags sets up multiple shell corporations in the Cayman Islands before the police catch up to his schemes. Indeed, a shell corporation is an often abused financial entity — but not all shell companies are illegitimate. In fact, wealthy business owners and companies use them as a financial strategy to reduce taxes legally. So, what is a shell company, and how can you use them to build wealth? We’d recommend chatting with a wealth manager to explore your options first, but we’ll give you the 411 on shell companies here, too. 

What is a shell company?

A shell company is a corporation that lives only on paper. They have minimal assets, business operations, or employees. All corporations are considered separate legal entities, as if they were their own living, breathing person. A shell company is no different, but it doesn’t have much activity within it.

Sounds counterproductive for business, right? Shell companies don’t really make money like other businesses. However, they’re often used to simply hold money, facilitate business transactions, and keep business people anonymous.

What is an example of a shell corporation?

Business owners open and close shell corporations all the time. One example voiced through political ad discourse via Facebook is Russians using shell corporations to appear US-owned. For example, a Russian citizen could theoretically open a shell corporation operated in a tax haven country yet appear to be owned by someone in a US state. This example posed a threat to Facebook’s strategy to ensure political ads are posted from companies based in the US. 

Another example of a shell company is the one revealed to have been owned by Apple in 2013. The iPhone producer managed to avoid paying taxes on record profits by moving its funds into an offshore account on the Channel Island of Jersey and Bermuda. The result was paying under 1% in taxes that would have otherwise been charged at 12.5% in Ireland. 

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What is the purpose of a shell company? 

The purpose of a shell company is to realize some financial benefit. This might include saved losses from poor public relations, minimized liabilities to your person, or reduced taxes if based in a tax-haven country. Most entities use shell companies to hold assets, secure financing, and maintain a level of anonymity in their business dealings. 

What a shell company is not is the front end of the business. Usually the actual revenue and expenditures generated from the business activity does not flow through a shell corporation. Most companies consist of a group of corporations, some are operational and some are shells. Together, the system can optimize wealth for the owners.

How do you tell if a company is a shell company?

Shell companies are started to help businesses become more anonymous and attain financial benefits. Look for the following to identify such an entity:

• Asset ownership — Do they have a ton of assets? Or is their balance sheet value closer to $0?
• Place of business — Is the address a clear place of business or seemingly unoccupied?
• Employees — Shell corporations don’t have any. 
• Tax havens — Is the company based in a country considered a tax haven, or does it have a parent company or subsidiary based in a tax haven?

Are shell companies legal in Canada?

Yes, shell companies are legal in Canada as long as they’re used for legitimate and legal business activities. If you’re using a shell company to evade your taxes, that’s not legal. The same thing goes for money laundering (but more on that later). Shell companies have a wide array of uses and benefits that could help businesses and individuals in a legal fashion. However, you may get some raised eyebrows during the process, so be prepared to navigate!

What is a shell company in money laundering?

What is a shell company’s role in a money laundering operation? Here’s how it works: 

• Step one: People deposit illegally obtained funds into a shell corporation’s banking account. 
• Step two: Criminals create fake invoices from the shell corporation to their personal accounts, sometimes with fake names. 
• Step three: Money is deposited from the shell corporation to the criminals’ accounts under the guise of a legitimate business transaction.
• Step four: Rinse and repeat — the shell corporation essentially cleans the dirty money and helps criminals evade suspicion from financial authorities.

The Panama Papers was a giant scandal that highlighted how easy it was for business owners, criminals, celebrities, and politicians to launder money via shell companies. The key player was a Panamanian law firm — Mosaack Fonseca — who targeted criminal companies involved in money laundering to help them set up shell corporations to fuel their illegal business dealings and tax evasion. 

Furthermore, the US Federal Bureau of Investigation (FBI) constantly operates initiatives to stop criminals from using shell corporations to conduct illegal activities. They often run into obstacles through delays in identifying owners of shell corporations, or waiting months just to figure out that the owner is yet another shell corporation. The Canadian government also routinely investigates money laundering to stop and mitigate criminal activity.

Can a shell company go public?

No. Shell companies can’t be publicly traded, so you can’t invest or buy shares on a stock market. These are paper-only companies with a name, business number, and address — but with minimal business activities. In order to go public, entities have to prove legitimate business activities, which a shell company does not have. In fact, you’d be hard-pressed to find investors for a shell company since the whole idea behind them is anonymity. 

Related Reading: How to Invest in Private Equity

What are the benefits of a shell company?

Here are some common benefits that drive people to start shell corporations: 

• Anonymity and security: Your full name on an asset might not pose much of a threat in Canada, but if you’re operating in a country with less security, shell corporations offer some privacy. Additionally, business owners might prefer a shell corporation’s anonymity for public relations reasons. Perhaps they want to minimize bad press amidst a merger or acquisition.  

• Obtaining financing: Sometimes, you can’t secure financing if you’re an individual with too many debts or liabilities. The same goes for corporations with a large portfolio of debts. Shell corporations act as a fresher start and help businesses obtain financing with fewer obstacles. 

• Asset protection and organization: Shell corporations might help you hide assets under threat of seizure via a non-amicable divorce proceeding or lawsuit. Similarly, you could use shell corporations in estate planning to help you organize and divide your assets. 

• Real estate investing without as many liabilities: One common example of a shell corporation is an investor who creates a company to buy a piece of real estate. Now, why would you want to keep your name anonymous on the title? You might enjoy less liability on your person. If something happens where the building owner could be liable — a fire and a tenant suing for damages, for instance — you could simply pay out of the company or bankrupt the company before you’re liable as an individual. 

• Tax havens: Business owners sometimes flock to places like the the United Arab Emirates, Panama, or the Bahamas because they have significantly fewer income taxes than Canada. So if you set up a shell corporation based in a tax haven country, you could benefit from lower tax bills. 

What are the drawbacks of a shell company?

Shell corporations pose some tax and anonymity benefits, but they’re not risk-free. Here are some drawbacks you should consider before starting a shell company: 

• Poor public relations: While some business owners use shell companies to enhance their public image, the opposite can happen. Remember the Panama Papers? Of course, many of the politicians and businesses involved were using shell companies illegally. But the entity nonetheless has a brush of perceived illegality and shadiness that could rub some of your clients the wrong way and damage your credibility. 

• Criminal investigations: If you’re named or otherwise revealed to have a shell company, you could be subject to an investigation by the CRA and authorities. Even if you’re using a shell corporation legally, an investigation could still hinder your business and become a nuisance. 

• Not worth it for average Canadians: Shell companies provide the most benefits to higher-income individuals and businesses. If you’re in the middle or upper-middle class, they are probably more trouble than they’re worth.

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How powerful is a shell company?

What is a shell company’s value to today’s businesses and individuals? A shell company is a powerful tool for businesses to reduce taxes, liabilities, and reputational risk that comes with identification. They’re useful tools if you use them legally and correctly, but pose some risks if you cross the line into illegal territory, like money laundering. 

The best way to leverage a shell corporation? Knowing what you’re getting into before you do it. That’s why it’s best to consult a professional like a wealth manager to assess where a shell corporation is a useful endeavor for you and your business. Find a wealth manager today!

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