What is a shell company?

Shell companies are utilized by unscrupulous businesses and business people, but also by large well-known public companies and private individuals. Shell companies can also act as tax avoidance tools for legitimate businesses. For example, Apple's corporate entities are based in the United Kingdom. They might also be utilized to gain specific forms of financing.

However, when employed for tax avoidance purposes, this can be seen as a tax loophole or even tax evasion; many times, shell companies are used in black or gray market activities. It is natural for the public and law enforcement agencies to be skeptical, and even suspicious, of shell companies.

The most common reason to start a legitimate shell company is to help produce a tax haven abroad. Large companies choose to take their jobs and profits offshore to take advantage of fewer and looser tax codes.

This practice is also referred to as "offshoring" or "outsourcing", meaning that work or companies that once were taxed domestically are now taxed aboard by less strict tax codes.

To remain legal entities, shell companies are set up by large corporations in foreign countries where they are outsourcing or offshoring work. In most cases, this is a legal practice in the United States, and some attribute the rise of this practice to the United States tax code itself.

Another reason that shell corporations assist with tax issues involves the necessity for financial institutions to perform a financial activity in foreign markets. This enables them to invest in financial markets outside of domestic markets and produces potential tax savings.

Though there are legal ways to utilize shell companies, many corporations, and individuals abuse this practice in unscrupulous or even illegal ways. Many wealthy business people or other financial elites misuse shell companies purely for personal gain and profit.

Tax brackets in the United States have led to more and more wealthy individuals and companies taking advantage of starting shell companies abroad or even domestically.

People with extremely high earnings often set up shell companies in locations like the Cayman Islands. This is a gray area of tax evasion where wealthy people funnel their or their company's earnings through shell companies in a way that it isn't counted toward their personal income.