What is a limited company and a shell company? A limited company is one where the risk is limited to the money the company has. A shell company is a company without any business operations or assets.
I’m going to use the word company here, but there are some differences between company and corporation. The biggest difference is that corporations are owned by shareholders and a company can be owned by an individual or a group of partners. The word corporation comes from the Latin “corpus”, which means “a body of people”. The abbreviation .Inc after a business’s name stands for “incorporated”. Company comes from the French “compagnie”, which means friendship or society. By 1550, it had taken on the meaning of a group of people united in a business venture.
So, what is a limited company? A limited company is a way of restricting the risk that the owner of the company or the shareholders face. If you start a company, you need a lot of money to get it off the ground. Maybe you invest all of your savings into it, or maybe you borrow money from your parents (like Jeff Bezos did), and the company starts to make money you can reinvest the money into the company, and you can start to pay yourself a salary. Maybe you borrow more money so that your company can grow, and you make even more money. Then, things change and the demand for your product disappears. Your profits crash and you are not making any money anymore. However, you still have all the debts to repay because you borrowed a lot of money to get your company going. If your company is not a limited company, then the people you owe all of that money to can take everything that you own. They can take your house and all of your money because you are liable for all of the debts. If your company is a limited company, then the people you own money to can only take the assets of your company and all of your personal possessions and money are safe.
So, what is a shell company? A shell company is, as the name suggests, a shell that has nothing inside it. A shell company is a company that has been set up to hold assets. Shell companies don’t have employees, they don’t do any business, and they are not listed on any stock markets. We probably think that shell companies are illegal, and they can be used for illegal reasons, but many of them are totally legal.
Anybody can set up a shell company. It costs about $1000. However, the more money you have, the better it will be and the more easily you can hide funds in it. Some companies use shell companies to protect assets if they are working in a dangerous country, such as one about to undergo a civil war. A shell company based in another country can stop anybody getting their hands on that company’s assets. Shell companies can be used if one company doesn’t want to be seen doing business with another company. There are many reasons why a company would need a shell company, but most of them come under the “if it’s not wrong, why do you need to hide?” line of thinking.
The biggest reason to use a shell company seems to be to avoid paying tax. Many large companies have used this system. Apple is probably the most famous example. In 2017, a series of 13.4 confidential documents relating to offshore investments were leaked to German reporters. There was a lot of information about a lot of companies, but one thing that was revealed was that Apple had created a shell company in Jersey and another one in the Bahamas. Apple comes up with nearly all of its technology in its offices in California. California has a 35% business tax, which is a lot of money on Apple’s several hundred billion dollars profit. However, Apple registers those patents to its shell companies in Jersey and the Bahamas, where the tax rate is somewhere between 0 and 1%. All of its profits are accrued offshore and cannot be taxed. The released documents showed that Apple was doing this, along with a lot of other companies, but the interesting thing is that it is not illegal. Many people were complaining that Apple was avoiding tax. Of course Apple was avoiding tax. Apple is a shareholder run corporation and their job is to avoid tax in any way that they legally can. If governments want them to stop avoiding tax, they have to make the shell company scheme, and the other schemes they come up with illegal. And this is what I learned today.
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Sources
https://www.investopedia.com/terms/l/limited_company.asp
https://smartasset.com/investing/what-is-a-shell-company
https://www.investopedia.com/terms/s/shellcorporation.asp
https://testbook.com/key-differences/difference-between-corporation-and-company
https://uk.indeed.com/career-advice/finding-a-job/corporation-vs-company
https://marketrealist.com/p/is-facebook-a-private-company/
https://en.wikipedia.org/wiki/Corporation
https://en.wikipedia.org/wiki/Paradise_Papers