How do Shell or Holding Companies Work?

In the media and in the eyes of the general public, the concept of a shell company implies something secretive and hidden–companies hidden behind companies, in order to hide illegal behavior, or shield assets from creditors, or deceive the public as to who actually runs or owns a company.

But in the real world, shell companies–which are legally also called holding companies–do and can serve a legal and legitimate purpose.

What is a Shell Company?

A shell company is a company that is formed not to actually do any business independently on its own, but rather, for the sole purpose of owning an asset or property, for and on behalf of another company.

This is how shell companies get their (bad) reputation–you can hide who actually owns an asset, because according to state records, the owner is the shell company, with little ability for the public to tie the shell company to whomever actually owns or controls that shell company, if the shell company is set up correctly.

Why Would You Want One?

There are cases where anonymity is necessary and it is done completely legally and strategically.

Imagine, for example, that your company owns expensive assets–assets that you don’t want others, who might be privy to your business records, to know about. Shell companies can also hold and own trade secreted information, which you may not want exposed under the public eye of your primary company.

Imagine that you wanted to start a new business venture, but don’t want others to know. In preparation, you need the assets of the new company to be separate from those of the company you currently own, perhaps that’s to shield those assets from competitors, or the media.

Often, companies will conduct mergers, but not of their primary businesses–just mergers of part of their businesses. By moving assets to be merged into the shell or holding company, you can now merge or co-own or transfer those assets, without affecting the affairs of your primary company.

Using Them (Potentially) Illegally

Some people might choose to conduct what may be legally risky behavior, under the masthead of the shell company instead of their primary business.

There are times where it is OK to do this, but other times where doing this could be seen as illegal. If you’re forming or using a holding company because you fear legal repercussions blowing back on your primary business, make sure to get legal advice in advance, before putting yourself at risk.

Discovery is Possible

And remember that as effective as holding companies are in proving anonymity–they aren’t foolproof.

In a lawsuit, with the tools of discovery, it isn’t difficult for the other side to discover the relationship between your main company and your holding company. Holding companies are much more effective as far as providing anonymity, outside of the courtroom.

Is a holding company right for you? Ask us. Call our Fort Lauderdale business and corporate litigation attorneys at Sweeney Law P.A. at 954-440-3993.