When researching the different business structures available in the UK to the prospective business owner, there can be a lot to take on board. Private limited companies, public limited companies, sole traders, and partnerships. They’re all routes the budding entrepreneur could consider. But you may have also read about another business type, the shell company.
In this post, we’re going to look at shell companies and explain why they wouldn’t be considered an option for the new business owner. Let’s get started.
Shell companies: The basics
A shell company (also known as a shell corporation) is not an official business type that is registrable with Companies House, like a private company limited by shares, a private company limited by guarantee, a limited liability partnership, or a public limited company.
Instead, it’s a business’s actions and traits that lead to it being referred to as a shell company.
A shell company will often:
- Have no employees
- Have no clear owner
- Not partake in any trading activity
- Not have a physical address
- Be registered offshore
Hence the word ‘shell’. A normal business from the outside but nothing, or very little, on the inside.
The main purpose of a shell company is to move and hold assets.
Its inactivity is why a shell company would not generally be of any interest, or even relevant, to someone looking to start their own business. Shell companies are very much the domain of larger business entities and, as you’ll see below, often people breaking the law.
Shell companies and illegal activity
Shell companies have strong links to illegal/questionable business practices, in particular:
- General illegal activity (facilitated by the anonymity a shell company can provide its genuine owners)
- Money laundering
- Tax evasion
- Asset concealment
High-profile news stories, such as the ‘Panama Papers’ – where politicians and other figures set up shell companies for the purposes of evading tax – have a large part to play in why shell companies are now common knowledge.
Why run a business as a shell company?
For the purposes of fairness, shell companies do not always operate in an illegal manner. There are some legitimate reasons why a business may appear to be running as a shell company:
A defunct business
A business has sold all of its assets and ceased any trading activity, but the shell of the company remains, perhaps with the intention of starting to trade again.
Investing in foreign markets
Starting a business – albeit a shell – in an overseas company will sometimes make it easier to purchase property and invest in other businesses in said country.
A launch pad
Before a new business goes live, a shell may be in place to get the necessary funds organised.
Take advantage of ‘Tax Havens’
Moving into a grey area, by setting up a business overseas, a company can take advantage of less restrictive taxation and tax laws.
Shell companies vs shelf companies
Shell companies should not be confused with shelf companies. Shelf companies are companies that are set up with Companies House (normally private companies limited by shares) with placeholder directors and shareholders, for the purpose of selling on at a later date.
The primary benefit to purchasing a shelf company is that it gives the impression of a business being in existence for longer than it actually has. However, this is debatable.
Not only does confusion arise from the similarity in their names, but shell companies and shelf companies also share another trait, their inactivity. From a shelf company’s incorporation up until it is sold, it is kept in a dormant, yet compliant state.
Doing your due diligence
Shell companies and their links to illegal business activities highlight the need for businesses of all shapes and sizes to do their due diligence when it comes to choosing who they work with (whether this is as a customer, supplier, or partner).
There are a number of ways that you can do this:
The Companies House public register – The Companies House ‘Search the register’ tool allows anyone to freely look into a company’s key information, including annual accounts and officer details (such as directors, shareholders, and people with significant control). By looking into the people behind the business, you can get an insight into any other companies that they are involved with, allowing you to see the big picture.
Online reviews – If a business is in the service industry, it is highly likely to have a trail of online reviews. As well as paying attention to the actual ratings, you should also consider the volume of reviews, how recent they are, and whether they look legitimate or not.
The website – Whilst a business’s website is curated to paint the perfect picture, you should still consult it to check for testimonials from satisfied clients, a contact page that includes valid contact information (such as a physical address, email address and phone number), and an ‘about us’ section that mentions real people.
Professional credit check – Businesses such as Experian and Equifax allow you to check on a company’s credit rating and score, giving you an indication of how financially stable they are.
You should also apply all of the above checks to your own company. This will allow you to see how other people see you and give you the opportunity to fix any red flags.
Thanks for reading
You should now have a good understanding of shell companies, including what they are and how they’re used (legally and illegally).
We hope you have found this post helpful. Please don’t hesitate to leave a comment if you have any questions.