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All Companies Start as Shell Companies

July 18, 2011

A shell corporation is a company which does not have any significant assets or operations.  Logically, every company, whether a corporation or LLC, is a shell when it is first created because it does not yet have any assets or operations.  Don’t confuse a shell company with a ‘shelf’ or ‘aged’ company (to be discussed later).

 

That changes as investors put capital into the company, or as the company begins to produce goods and services, hire employees, generate revenue, etc.  But this happy chain of events doesn’t always occur.  Why not?

 

There are many legitimate reasons a company may remain a shell.  Many people who purchase or create a company have great business ideas, or great business needs, but may not necessarily have great business skills.  As a result, an owner’s interest may wane; perhaps the company was set up incorrectly, and the owner decides to set up a new company, rather than fix the old one; maybe funding that was a sure thing turns out not to be so sure; a competitor could get up and running faster and better; the business opportunity could be purchased; maybe the intellectual property on which the business model relied turns out to belong to someone else.  There are myriad reasons why a company may not have significant assets or operations.  Most of them are business related.

 

Sometimes, a company may remain a shell for legitimate business reasons.  Often, a shell company is really a holding company, in that it is used merely to hold ownership in another company, or is used to hold just a single asset.  Holding companies are used to shield the owners from liability; they may be used as business divisions to hold different brands; they may be used to protect the owner’s privacy (something owners have a constitutional right to, in the United States).  Often, a corporation or LLC is used to hold a home, so that the homeowner is not identified on county records (public figures or law enforcement types may do this, so the people they arrest can’t look up their families).

 

Shell companies are also used for illegal purposes, such as money laundering or tax evasion.  But let’s not confuse the crime with the tool.  Ski masks can be used to protect your face from the elements during recreational activity, but they can also be used to hide your identity when robbing a bank.  Should we regulate ski masks?  Or refuse to do business with the department store that sells them?

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