Also known as: shell corporations · shell company · shell companies · shell corp · dummy corporation · front company
Written by attorneys · grounded in primary & secondary sources — see below
A corporation formed with minimal capitalization and no substantial business operations that serves as a mere instrumentality of its controlling shareholder. The entity typically fails to observe corporate formalities such as issuing stock, holding meetings, or maintaining separate records. Courts may disregard the corporate form when the structure is used to avoid personal liability and respecting it would sanction injustice.
Randall formed Fair Stay to operate a boutique hotel. He deposited all rental revenue into his personal account, paid both business and personal expenses from it, issued no stock, held no meetings, and kept no records. When Fair Stay could not pay Premier Hotels for contracted services, the court disregarded the entity because Randall had treated it as an undercapitalized shell used solely to shield himself from liability.
Ellis Neder used shell corporations set up by his attorneys to purchase land parcels at low prices. He immediately resold the parcels at inflated values to limited partnerships he controlled and obtained bank loans based on the higher appraisals. The scheme concealed his control of the shells and the true purchase prices from the lenders.
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Renee formed a shell company to buy outdated encryption software at a low price. She then negotiated a pre-incorporation agreement to sell the software to the soon-to-be-formed Cedar Logic at more than three times her cost. The markup generated a secret profit that she disclosed only to two early investors rather than to all contemplated initial shareholders.
Courts examine whether the entity was undercapitalized from the start, whether the owner commingled personal and corporate funds, whether the owner failed to issue stock or maintain records and meetings, and whether the owner treated the corporation as a personal liability shield rather than a separate business.
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No. Undercapitalization is an important factor but must be combined with disregard of corporate separateness and a showing that respecting the form would promote injustice or sanction fraud.
Supporting sources
A court may disregard the shell when the promoter used it to conceal a secret profit on a pre-incorporation transaction and failed to make full disclosure to every person contemplated as an original investor.
Supporting sources
…transactions financed by fraudulently obtained bank loans. Between 1984 and 1986, Neder purchased 12 parcels of land using shell corporations set up by his attorneys and then immediately resold the land at much higher prices to limited partnerships that he controlled. Using inflated appraisals, Neder secured bank loans that…