How do the rights and responsibilities of a shell company differ from corporations organized in other ways?

Question

For instance, does a shell company need to have a separate board of directors and bylaws, or can it be controlled through the governance of another company? Can such a company be managed by and answerable to only a single individual?

One of the reasons for using a shell company is that "Shell companies can be used to transfer assets from one company into a new one, while leaving the liabilities in the former company." My understanding is that a shell company might be reasonably used as a trustee for a trust, or to as a holding company of an operating company, or intangible assets.

Does that mean that a shell company that is constructed to have no assets and no liabilities can sign contracts and take corporate actions on its own behalf, or can it only act as a conduit vehicle for the transactions of other companies? And what paperwork is necessary to perform this conduit function? Something like contracts or corporate resolutions?

Answer 1

A "shell company" is not a category of company recognized under state corporate laws, under which U.S. corporations are organized. It is subject to the same formality limitations as any other company. These requirements vary considerably from state to state. Many states authorize a corporation to have a single director on the board of directors who also serves as sole officer of the company, although some states require that there be more than one director, and/or that there be at least both a president and a corporate secretary to certify the validity of corporate actions and maintain its records. The modern trend is towards laxity in regulating the internal organizational matters of corporations, and to conduct business by written authorization to act without a meeting in lieu of resolutions adopted in board of directors meetings.

The main state corporate law issue involving shell companies is the extent to which the directors and officers of a corporation controlled by another company may lawfully act in a manner that benefits the controlling company while harming the company to whom the directors and officers would ordinarily owe fiduciary duties, for example, by guarantying a debt owed by a sister company without receiving anything in return as consideration. The modern trend is to allow such actions without considering them to be a breach of fiduciary duty to the corporation acting against its own interests, but the law is not uniform across all U.S. states on this point.

The analysis of whether a company is a "shell company" usually comes up when a determination is being made as to whether it should be ignored for the purposes of enforcing other laws.

In the debtor-creditor situation (including tort creditors such as personal injury victims, as well a monetary debt creditors) the question normally comes up in the context of determining if it is permissible to "pierce the corporate veil" or the treat a shell company as undercapitalized for purposes of applying the Uniform Fraudulent Transfer Act or similar legislation, effectively disregarding the entity whose sole purpose is to inappropriately defeat valid creditors.

In the tax context, some entities are required or allowed to file consolidated tax returns that disregard the existence of separate corporate entities, or in the case of single member limited liability companies as "disregarded entities" that have no separate existence for tax law purposes.