Also known as: shell company · shell corporation · shell corporations · shell corp
Written by attorneys · grounded in primary & secondary sources — see below
A corporation lacking independent substance or adequate capitalization that serves merely as an instrumentality of its controlling shareholder. Courts disregard the entity when it fails to observe corporate formalities and exists only to shield the owner from personal liability.
Serena Soto formed Summit Bank with a few thousand dollars and deposited all customer fees into her personal account. She paid both business and personal expenses from the same account and never issued stock or kept minutes. When Summit Bank defaulted on a large contract, the creditor sued Soto individually. The court treated Summit Bank as Soto's alter ego and allowed recovery from her personal assets.
Samantha Stone formed a shell company to buy outdated software cheaply before her new corporation existed. She then sold the software to the new entity at a large markup and disclosed the profit only to two early backers. After the corporation discovered the arrangement, it sued Stone to recover the secret profit because the shell hid her self-dealing from other contemplated investors.
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A court applies a two-prong test. First it asks whether the entity was the shareholder's alter ego because of undercapitalization, commingling, and failure to observe formalities. Second it asks whether respecting the form would sanction fraud or promote injustice by leaving creditors without recourse.
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No. Filing reports and maintaining a nominal license do not overcome evidence of commingling, total failure to keep records, and severe undercapitalization from the outset.
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No. A promoter owes a fiduciary duty to disclose any profit from a pre-incorporation transaction to every person contemplated as an original investor. Using a shell to hide the markup does not satisfy that duty.
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Yes. An agent must account for any profit arising from a transaction conducted on the principal's behalf. Routing a secret discount or rebate through the agent's shell company does not change that obligation.
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