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Holding Companies vs. Shell Companies

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The longer you own a business, the more you enter into the murky world of corporate governance. There are many options available to facilitate the growth of your enterprise, with decisions ranging well beyond whether to incorporate or file as an LLC. Below, we discuss a particularly opaque area of corporate law and governance: the use of holding companies and shell companies. Call a Houston business law attorney with additional questions or for help with a Texas business law or real estate matter.

What is a Shell Company?

A shell corporation is a business entity without substantial assets or active operations. They are designed to facilitate business transactions or to serve a specific function, such as reducing tax liability, storing funds, or maintaining anonymity. Shell companies are more appropriately described as legal tools than as actual companies. They have no assets, no physical location, no real employees, and they are not involved in the operations of any particular business.

Instead, shell companies hold assets in one or more businesses and behave as inactive companies. Shell companies may be utilized by domestic businesses to benefit from tax havens abroad. They may be used to facilitate the hostile takeover of another company. They may be used when taking a company public, to secure assets such as intellectual property, or to limit individual or corporate liability.

Shell companies have been slapped with a bad reputation in the media, but there is nothing inherently illegal or wrongful about them. Many startup companies, for example, will establish shell companies to hold funds in the early stages of financing.

What is a Holding Company?

A holding company is also a business entity that operates more to serve a particular function rather than to actively engage in business operations. A holding company is the parent to another company or, more frequently, to multiple companies. The holding company does not actively engage in the operations of the held companies but instead simply holds enough stock of the companies to maintain ownership.

Holding companies are useful in organizing, overseeing, and managing a group of companies. They may retain the right to exert managerial control over subsidiaries, such as the right to hire or terminate directors and corporate officers. They may also leave management to the judgment of the subsidiaries, and they may do little more than facilitate the transfer of assets like intellectual property or real estate.

Do I Need a Shell Company or a Holding Company?

There are many reasons why your corporation may benefit from establishing a shell company or holding company. A shell company can help you maintain your finances, benefit from favorable tax laws in other jurisdictions, invest in foreign markets, protect your anonymity in certain transactions, or limit your liability. You may want to establish a shell company to facilitate a one-off transaction for a particular purpose.

A holding company, on the other hand, can help you manage the policies and management across a number of different business operations. If your enterprise has grown into multiple entities, a holding company allows you to oversee the entire operation as a whole and facilitate overall corporate direction and smooth synergy between different companies. A strong holding company can help bolster subsidiaries, benefiting from greater access to capital and other advantages.

Talk to a knowledgeable Texas business lawyer about your enterprise and your needs. Your attorney will help you understand your options, work with you to determine whether establishing a shell company or holding company is in your best interests, and walk you through the process.

If you need legal assistance with a Texas business law matter, contact an experienced and detailed Texas business formation and corporate reorganization lawyer at the Houston offices of attorney Leigh Meineke at Stephens | Domnitz | Meineke PLLC by calling 832-706-0244.

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