Terms Beginning With 's'

Shell Corporation

  • January 11, 2020
  • Team Kalkine

What is a Shell Corporation? 

Shell corporation is a company which is legitimate but has no financial assets, and it only exists on papers. These legal entities have no significant business activities; they do not hire employees and also don't generate any revenue. 

These corporations obtain money and mainly control over a conglomerate company to engage in financial transactions. Their functioning allows the firms to get tax benefits. Though the shell corporations are formed to avoid taxes, they are usually used for black and grey market activities. They are also created to transfer assets from one company to other leaving behind the liabilities.

Good read: Tax Havens : All You Need To Know

Shell companies are commonly used in illegal activities such as money laundering. These firms often hide or protect the company's assets in a perfectly legal manner. 

They are also known for legitimate activities like putting funds in the seed stage startup. 

For instance, large companies like Apple, which are based out of the United States, moved their jobs and profits offshore. These companies take advantage of liberal tax policies. They earn their profit from the process of "offshoring" or "outsourcing" their work. These companies then form shell companies in the countries they are outsourcing work. 

How to create a shell corporation? 

It is effortless to form a shell corporation; usually, an anonymous shareholder of a company buys shares of a shell company. The shareholder then takes full control of the shell company, which he/she eventually merges with a private company. 

Once this process is over the original company is left with nothing but the "shell". The newly formed company is then referred to as shell corporation. The shareholders entirely control the new company. They can use the shell company to accumulate a massive chunk of public company shares and leverage their control.

Usually, shell corporations are registered in the country they are created. Creating a shell company in a foreign country is legally permissible in many countries. 

There are special agencies who have authorised agents on board to help companies and individuals set up shell corporations. These agents do all the administrative work such as paperwork and getting permissions from bureaucrats' offices, which are required to set up a company in a foreign land. Shell corporations are then required to register over phone or online. The agents pay the fees and register his/her name along with the nominal owner or shareholder directors’ name to complete the process.

The hassle-free and cheap way makes it easier to create a shell company. Many times, to create anonymity of the owner, shell corporations are registered and owned by another shell company. This layer creates a high level of secrecy as, at the time of the investigation, the owner is protected because each shell company is registered in different countries. 

Which country has the most shell companies? 

Shell corporations are mostly found in tax haven countries, meaning they have significantly less stringent tax codes and high privacy laws. 

According to Global Financial Integrity, the United States is the second most popular choice for businesses to form a shell company. States such as Delaware, Nevada, and Wyoming provide a perfect environment because of lax requirements to start a shell company and follow strict privacy laws.

With a shell company in the U.S. foreign businesses can invest in the U.S. real estate market. The large amount of real estate investment in the U.S is made through shell companies. 

Switzerland is also famous for providing safe harbour to the shell companies. According to Economist Gabriel Zucman, about 60 per cent of the money in Swiss bank accounts are from shell corporations. 

Apart from Switzerland and the United States, some of the other tax havens for shell companies are: 

What benefits shell corporations provide to the business? 

Businesses and individuals use shell companies for various benefits. 

Tax benefits: Business grows its operations along with limiting the tax burdens through forming shell companies. Companies can increase their reach in new markets and boost profits by operating through a country which has lower tax rates. 

Even if the businesses do not wish to operate in the foreign land, they can still set up shell companies and invest in that country in markets like stock and securities exchanges. The states referred to as tax havens are tax-advantaged offshore hotspots for shell companies to operate. 

Protecting assets: Shell corporations are also used by businesses to hide their assets. The shell company owners’ records are anonymous; hence it makes it easier to conceal financial transactions. Some businesses also use shell companies to protect their assets by keeping the capital stable.

For instance, a person living in Greece will have his capital value decrease substantially. But if the capital is held in a shell corporation in the foreign land, he will be able to avoid the volatile Greek economy easily. 

Access to foreign markets: Shell companies are usually registered in the foreign land which gives businesses and individuals access to the lucrative marketplaces in that particular country and also other countries which have easy trade relationships with the registered state.

For instance, if you have a shell company in Switzerland, apart from the tax benefits, you will also be able to access the market in the country and countries in Europe. Similarly, if you have a shell corporation in the United States, you will be able to access the lucrative U.S. markets for investments. 

Why should businesses avoid creating a shell company? 

Shell corporations are easy to form no doubt, but they are risky to operate. Because the shell companies have a negative reputation in the market, the company's credibility may get dented for being associated with a shell company. The current U.S. administration is focusing on U.S. based companies to generate jobs in the U.S. rather than operating offshore and outsourcing.

Not all shell companies are illegal, but they hold personal assets which exist in the grey area legally. Also, hiding taxes is a civil or criminal punishable offence in many countries. Hence it makes the shell company's objective questionable. 

The recent Panama Papers scandal is widely known, where more than 11 million secret documents were revealed. The papers of the shell company's owners were registered by the Panamanian law firm Mossack Fonseca.

A considerable number of government officials and public figures from many countries were involved in the Panama Papers scandal related to various crimes such as tax evasion and money laundering. 

In equity, a kicker is an additional option attached to the debt securities issued by any corporation, which allows the investor to acquire shares in the same company upon exercising kicker option.

National Securities Clearing Corporation (NSCC) was established in 1976 as a subsidiary of Depository Trust & Clearing Corporation (DTCC). The Corporation performs clearance, settlement, risk managing, central counterparty services and a guarantee of accomplishment for specified transactions in the financial industry.

In 2013, the television host of CNBC's Mad Money, Mr Jim Cramer addressed few stocks as “totally dominant in their markets”. He was referring to tech titans and named them FAANG stocks (where the extra “A” was added 5 years later, in 2017). ALSO READ: Investment in Technology Stocks - A Beginner's Guide What Are FAANG Stocks? “FAANG” is perhaps one of the most popular abbreviation of the business world. The acronym illustrates stocks of the famous five US-based technology corporations- first being social media giant Facebook Inc., followed by software and hardware developer Apple Inc., the e-commerce magnate Amazon.com Inc., and the streaming service provider Netflix Inc., along with the last FAANG member, internet ace Alphabet Inc. (formerly recognised as Google). Originally, the acronym was FANG (with an “A” for Amazon.). In 2017, investors included Apple in the group, turning the acronym into FAANG. There is an interesting fact here- The original four FANG stocks were pure internet-based companies, but the later inclusion of Apple, that is a consumer hardware manufacturer, made FAANG stocks a broader group of giant technology stocks. Widely renowned among consumers, unique in their products and services, these stocks are of few of the largest companies in the world. They trade on the NASDAQ Exchange and are included in the S&P 500 Index, making up approximately 15 per cent of the index. Market experts believe that since these stocks have a large influence on the index, they tend to have a substantial effect on the performance of the S&P 500, in general. GOOD READ: FAANGs Defining Resilience Amid Market Downtrends Why Are FAANG Stocks Popular?  FAANG companies exhibit several competitive advantages that make them attractive long-term investments. Consider this- Facebook rules social networking, Amazon is the one-stop destination to buy goods online in today’s digital world; Apple’s iPhones are one of the most used and well-renowned gadgets globally; Netflix is considered to be a leader of online streaming; whereas Google is the search engine used comprehensively almost every day, everywhere. These disruptive companies benefit from what is known as the network effect (indirect value goods and services gain as more people use them). Facebook’s products are valuable to new users because of its vast other active users. Amazon’s Prime service brings millions of shoppers to its marketplace every day, making its seller services more attractive to third-party merchants. Millions of Netflix viewers provide feedback for the kind of content the company should invest in. Lock-in effect of the Apple ecosystem creates substantial switching costs for iOS users. FAANG companies have intangible assets. This opens doors to the possibility of producing higher levels of profitability than rival companies. Consider this- Facebook, Amazon, and Google have troves of user data to pursue advertisements. Netflix offers original content, exclusive licenses that make its content library unique. Apple, on the other hand, is one of the few technology companies that makes hardware as well as software for its devices. FAANG players contribute to radical lifestyle change. One obvious reason for the popularity of these market darlings is that each FAANG company has been known to transform not just their own industries and the markets, but also how we all live in the current contemporary lifestyles. What is the significance of FAANG Constituents? As the heavy weighting of FAANG stocks in indexes like the S&P 500 gives them an outsized impact on the broader stock market, it seems worthwhile for investors to learn a bit about them. How is Investing Community Exposed to FAANG Stocks? FAANG stocks have historically outperformed the S&P 500 index. Over the last decade, this famous group accounted for a large portion of the market’s gains and American economy growth. This seems obvious given that FAANG companies have a hoard of competitive advantages making them seem like lucrative long-term investments. Offering perhaps the hottest technology trends, FAANG stocks demonstrate strong sales and earnings growth. Each FAANG company is listed on the NASDAQ, so purchasing their shares is a straightforward process for most investors. The easiest path could possibly be via online brokerage account with companies that offer this service. At this point, it should be noted that FAANG stocks aren’t cheap. For instance, for most of 2019, one share of Google sold for well over USD 1,000 and Amazon traded above USD 1,500. However, a wise investor knows that past results do not guarantee future success. Sinusoidal equity market trends deserve closer attention to a lot of other aspects before making any investment decision. Therefore, investing in FAANG stocks should be vigilantly based on one’s research of fundamental and technical aspects and risk appetite. GOOD READ: Investing Tips: 4 Reasons Big Techs can always stay your best pal Are There Any Risks Associated to Investing in FAANG Stocks? Market experts believe that there are no sure plays in the investing world. Simply put, there is a risk in every aspect of investing. Though favourable market conditions and investor enthusiasm for technology seems to be here for good, global uncertainties always should be considered. Overly bullish expectations coupled with certain political pressures and economic worries may hinder these big techs’ growth. Some experts opine that as these companies continue to mature amid mounting worldwide risks, it may get increasingly difficult for them to maintain their rapid growth pace. Legal Regulatory, market and operational risks of these FAANG players need to be considered before taking any exposure to FAANG stocks. Amazon and Google have often come under regulatory examination for potential anti-competitive business practices. Facebook and Google have faced criticism for lack of data privacy and security. On the other hand, Netflix has encountered new competitors in streaming video and as few reports suggest, a huge debt load linked with content production. Valuations of FAANG players should be well justified viz-a-viz earnings guidance of these players, before taking any investment exposure. Are There Global Peers to FAANG Stocks? Just like FAANG stocks, there are several groups of companies that can be looked upon as peers to the tech group. Let us cast an eye on similar groups- The Australian variant, WAAAX stocks comprises WiseTech Global Limited (ASX:WTC), Appen Limited (ASX:APX), Altium Limited (ASX:ALU), Afterpay Limited (ASX:APT) and Xero Limited (ASX:XRO). GAFAM is an acronym for the five most popular US. tech stocks: Google, Apple, Facebook, Amazon, and Microsoft.  BATX is the abbreviation for the four popular technology stocks from China: Baidu, Alibaba, Tencent and Xiaomi. TAND, which comprise of Tesla, Activision, Nvidia and Disney are often looked up as future giants of tech. TANJ stocks in Hong Kong comprise Tencent, Alibaba, NetEase and JD.com. The Canadian big tech club DOCKS constitutes Descartes Systems, Open Text, Constellation Software, Kinaxis and Shopify. Do You Know These Interesting Facts About FAANG Stocks? The FAANG group has been a stock market superstar on both short and long-term basis. These stocks have more or less consistently delivered above-average sales and profit growth and maintained juicy margins. Let us look at a few interesting facts about these tech titans- In August 2018, FAANG stocks were responsible for nearly 40 per cent of the S&P 500’s gain from the lows reached in February 2018. Over the past decade, FAANG stocks have grown faster than the overall S&P 500 or the more technology-focused NASDAQ. There is no exchange traded fund dedicated solely to FAANG stocks. Since the market bottom in March of 2009, the worst performing FAANG stock, Apple, has returned over double that of the index average. Amid the COVID-19 market downturn FAANG companies were one of the biggest beneficiaries as the “stay-at-home” economy led to an acceleration in their trajectories as people’s lives shifted online. Rather than resting on their achievements and dominant market position, FAANG companies choose to use their cash on hand to make investments in cloud computing, AI and other technologies that they believe may lead to continued revenue growth.

What are the Factors of Production? Production of anything requires inputs to produce an output, and the inputs used in the production are known as factors of production. Alternatively, these are resources used in the production of goods and services.  Factors of production are also critical to economic growth given the economic growth requires expansion in output/national income or total production. Factors are a class of productive elements, which individually are known as units.  Units are interchangeable and homogenous, moreover, they are perfect substitutes for each other. Factors, which constitute a group of units, are not a perfect substitute for each other. Modern economists prefer using ‘inputs’ instead of conventional factors of production: land, labour, capital and entrepreneurship.  Classification of Factors of production Land Land includes all the natural resources available such as water and air. It constitutes a natural resource that yields income and is exchangeable for a consideration. In the absence of land, water and sun, a farmer cannot produce crops.  Every commodity traded in the world can be traced back to land directly or indirectly. Such as gold is extracted from mines, crude oil is explored and extracted from oil fields, grains are produced in agricultural land. Moreover, the land is arguably the ultimate origination of commodities.  Meanwhile, the quantity and quality of land are vital to yield an acceptable utility for the user. But the availability of land does not guarantee economic growth because the ability to use resource determines the optimal use of the resource.  Land can be further classified as renewable and non-renewable. Renewable resources can be used again and again in the production like an agricultural land used year after year for the cultivation of food, grains etc.  Non-renewable land is not usable again and again and is exhausted as the consumption increases. A gold mine may not yield additional income for a business when ore reserves are exhausted. And a new discovery would provide additional resource.    Land, as a blessing of nature, is fixed in supply. Whether the demand increases or decreases, the supply of land will remain the same. As a result, it is not dependent on the price, therefore supply of land is perfectly inelastic.  Labour Labour does include not only physical but also mental abilities that are done by humans for a monetary benefit. The contribution of labour depends on the size and quality of labour.  For instance, Japan has been successful in the production of small and compact cars, while the US producers were efficient in slightly heavy cars.  Higher productivity of labour will likely deliver favourable benefits. As a human factor, labour cannot be exchanged for value, unlike land and capital. Labour is used with land and capital and cannot be separated. Labour is available in return of wages and is not a saleable commodity. While one cannot store labour for future use, the supply of labour is dependent on the need for production. Labour supply is elastic, and it takes time to develop overall supply. Division of labour emphasises on the speciality of labour in a particular work. Every labour group in an organisation is further classified into various divisions, depending on the quality, skills, knowledge and demand.  Capital  Capital is a critical factor of production and largely means wealth, which includes stock of raw material, machinery, tools, building etc. It is also the money available for productive and investment purposes.  Capital also extends to physical assets such as machinery, raw material that are directly used in the production. Securities such as shares and bonds are not classified because they are not used in production, thus not the factor of production.  It is largely classified into fixed capital and working capital. Fixed capital is used in the production continuously and incur wear and tear. Fixed capital does not mean it is immovable, but the essence of fixed is the cost incurred, which largely remains fixed over the period of production.  The cost incurred in working capital is, however, recovered when the product is sold. Such as the cost of raw material, along with other inputs, is a component of the total cost of the good. Capital also includes human capital.  Human capital is also a vital unit of production and means the education, skills, and health of people. It is essential for the improvement in productivity. It is now understood that investments in human capital provide favourable growth.   Entrepreneurship Entrepreneurship is vital to confluence the factors of production and manages risk & uncertainty associated with the production. Now it is understood that production is a function of land, labour, capital, and entrepreneurship.  Entrepreneurship is more concerned with the incorporation of production, rather business affairs, which are managed by other people working on wages. Therefore, an entrepreneur takes the risk and uncertainty associated with production.  An entrepreneur is responsible for initiating a business enterprise and is engaged in assembling the factors of production, including land, labour, capital and entrepreneurship. Innovation and development are also associated with entrepreneurship.  Entrepreneurs undertake crucial decision of capital allocation, which may include setting up new factors, purchasing machinery, upgrading skills of human capital, innovating units of production etc.  Elon Musk is an entrepreneur aspiring to reach mars, produce e-vehicles, launch space travel. He is effectively managing and bringing about the factor of production to achieve results.  

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