Shell Corporations Versus Holding Companies

Fotolia_136329992_Subscription_Monthly_M-300x200The sale of a business can be far more complicated than simply signing contracts and transferring assets from one side to the other. Tax and civil liability can be incurred in a traditional sale, anonymity may be required for a host of reasons, and in hostile takeovers, the buyer will need to bypass the seller’s Board of Directors altogether and go directly to the shareholders in order to have the sale approved. Establishing a shell corporation or holding company are two examples of ways to accomplish such goals in a business transaction. A Silicon Valley corporate lawyer can help your business identify its goals and determine which tools best meet its needs in any sales transaction.

What is a Shell Corporation?

As a general matter, a shell corporation can be thought of as a tool for business transactions. As described above, shell corporation can be used to achieve specific goals in connection with business transactions, such as maintaining anonymity, reducing tax liability, or obtaining financing. For example, many startup companies utilize shell corporations in order to store funds during early stages of financing.

What is a Holding Company?

By contrast, a holding company is designed to hold the outstanding stock of another company. Holding companies can reduce risk for business owners while allowing them to own and control many different companies at once.

Determining Which is Right for Your Business

In order to determine which tools are right for your business transaction, it is important to identify your company’s specific goals and objectives in connection with the transaction. As mentioned earlier, shell companies can be used to:

  • reduce tax liability by accessing tax havens
  • stage hostile takeovers
  • store money temporarily
  • invest in foreign markets
  • protect anonymity in a transaction for security or public relations purposes
  • protect assets from lawsuits.

Holding companies, by contrast, allow increased efficiency in management by centralizing many operations and expenses. Subsidiary companies can thus enjoy lower costs of capital (for example, better interest rates for business lending) due to the strength of the holding company.

Thus, if the sale is a one-time transaction that needs to go through a separate company for a specific purpose (i.e., a hostile takeover which must be taken directly to shareholders), a shell corporation may be the better tool for the transaction.  On the other hand, if the goal is to retain or consolidate control over several companies, a holding company will likely be better suited to the task.  There are many other specific goals in connection with the merger or acquisition of businesses. It is important to consult with an experienced mergers and acquisitions attorney who can review the pros and cons of all options in order to find the right tools for your company’s specific needs.

Experienced Legal Representation to Protect Your Business

Businesses have many financial and legal interests that must be protected. The skilled corporate attorneys at Structure Law Group will work with your business to identify all potential areas of risk and recommend which tools will best protect your business from that risk. Call (408) 441-7500 today, or email to schedule your consultation with an experienced California corporate attorney.