How Secret Company Ownership is a Risk to Businesses and Investors

Last Updated: Oct 30, 2022
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Investors ought to be careful in the people that they’re dealing with in the business or businesses that they’re involved in. They need need to know who they are dealing with and what their track record is, because unfortunately, not all who get into corporate deals are good or honest people. When the criminal and corrupt hide behind secret or anonymously-owned companies, it makes it very hard for shareholders to manage all types of risk. The problem is that despite the laws enacted to protect corporations from criminal elements, too often these people somehow find loopholes in the system and conceal their true identity through several layers of fake business representatives called shell companies.

As a business owner, you may have come across the idea of a shell corporation. Shell companies are usually setup in tax haven countries, because these countries allow companies to operate in their territory for absolutely tax free! But these are just play on words, especially by the western mainstream media because some of their sponsors and maybe even stakeholders secretly owns a shell company. They wouldn’t want to offend them by stating the obvious on live TV – tax evasion. However, the use of shell corporations does not strictly fall under illegal purposes. It is common knowledge among business owners and investors of the use of use shell corporations for legitimate reasons such as capital raising.

Table of Contents

  • What is a Shell Company?
  • How Do Shell Companies Work?
  • Reasons for Setting Up a Shell Company
  • Disadvantages of a Shell Company
  • Key Takeaways
  • How Not to Get in Trouble with the HMRC and the UK Government


What is a Shell Company?
It is commonly known for shell companies to have financial assets and holds funds much like any existing companies, except that it does not have any business activities. They are also prohibited to hire employees, engage in trade on a public market, or generate income. Instead, their primary role is to handle the financial transactions of the companies or wealthy individuals that they represent.

Places like British Virgin Islands, Cayman Islands, Bermuda, The Netherlands, Switzerland, Luxembourg, Hong Kong, the Cayman Islands, Jersey, Singapore, and the United Arab Emirates are among the favorite spots in the world that business owners love to establish offshore shell companies, because they offer little-to-no-taxes. A tax haven is a country that facilitates tax avoidance through low tax liability for businesses. The most attractive thing (and also the most criminal) about tax havens is that they allow businesses and individuals to store their wealth by avoiding their tax obligations and not be subjected to the penalties of tax evasion in their home country.

International laws requires governments to respect each other’s laws and regulations and so the home country of the company that has an offshore shell company cannot be investigated, as it is legal in the foreign country where it was established even if it may avoid paying taxes to its home country. However, the home country of the business that has an offshore shell company must require the company to pay its taxes due.

How Do Shell Companies Work?
Shell companies work like an accountant/finance manager (for their business client and/or parent company) where their primary role is to manage company assets (i.e. money through their bank accounts), and not really dealing with business activities. But a shell company may also refer to a corporation that is almost non-existent, where the entity in question holds no significant assets or any business purpose (e.g. like a dormant company except it still exists).

For instance, a splinter of an old company that has sold all of its assets now only exists as a shell company. And although this is the state of this kind of shell company, the business owner still has the ability to transfer funds between the shell company and other business entities. Another advantage of having such a shell company is that you, as the owner, can choose to remain anonymous in records, effectively freeing yourself from being audited by the HMRC. This will allow business owners to conduct transfers between each other (through their shell companies) for illegal purposes, like money laundering.

Reasons for Setting Up a Shell Company
While there are a lot of illegal issues surrounding shell companies that makes them controversial, it is actually not against the law to setup one. For example, you can create a Special Purpose Acquisition Company (SPAC) as a designated shell company to raise capital for your business. A SPAC is a shell company set up to carry out an initial public offering (or IPOs). The purpose of this fundraising opportunity is to use the proceeds from that shell company for target acquisition on a prospected company in a hostile takeover bid or a merger.

This is actually a popular business strategy among longtime investors, CEOs and business owners and is considered a more effective alternative to traditional IPOs as a method of capital raising. The law also allows business owners to create a shell company with the sole purpose to hold funds prior to setting up a new limited or any other type of company, and then transfer the said funds there. An example of this would be when you are closing an existing company and you want to redistribute its assets to a new company that you plan to start.

Business owners creates shell corporations for these reasons:

  • To invest in foreign markets because a shell company will be registered under the foreign country you want to invest or trade in, therefore allowing you to legally own a company in that particular country even if you’re a non-native citizen.
  • To conceal your identity – sometimes there are lucrative markets in dangerous countries and you can benefit from those markets under a cloak of secrecy and remain safe from prying eyes.
  • To conduct hostile takeover – when you don’t want the CEO and board of directors to know who is buying their company assets, you can use a shell company and takeover the company anonymously and avoid any legal battles.
  • To protect your business assets – a shell corporation can shield your assets from any potential economic disaster in your home country or lawsuits.

Disadvantages of a Shell Company
Although it’s true that shell companies have key advantages when it comes to helping you achieve important business goals, they will also open doors that leads you to less than legal pathways that will eventually bring you into legal trouble with the law, and you definitely don’t want that. The ones that is at the highest risk of committing crimes against the HMRC are those that have hold assets in a different country. Without competent lawyers and accountants, you might be tempted to conduct illegal practices that will cause the UK government to slap you with criminal indictments.

Keep in mind that company litigations will not only strip you off your business assets, but you also risk doing jail time, so unless you’re a genius about the loopholes on the law, it is safe not to toy with it. Anonymity in owning a shell company is also not guaranteed, because sometimes unexpected things happen like a data leak, or a company informant who blows the whistle on you could expose you as the owner of a shell company engaged in illegal activities.

Key Takeaways
If you own a business, it would be in your best interest to know (or in case if you don’t know, learn) about shell companies and how they work to understand how you can use them toward your advantage. Shell companies are different from typical business entities and they do not have business activities, but they can hold financial assets or cash equivalents. Shell companies can be used for illegal activities like tax evasion and money laundering. But generally they are used for legal purposes.

How Not to Get in Trouble with the HMRC and the UK Government
If you secretly own a shell company or several of them (especially if they’re offshore), it may be best to talk to your lawyers and determine how best to declare this type of asset and pay relevant taxes for them to avoid getting on the bad side of the government. You may also consult with us, the HMRC and other experts on how to setup a shell company without committing a crime like tax evasion or money laundering. It’s always safer to arm yourself with information about shell companies before you embark on such endeavors.

Article by

Marequitta Dequito

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