Understanding the Use of "Shell Companies" In Real Estate Transactions

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The New York Times recently published a major five-part series detailing the “stream of foreign wealth” that has entered Manhattan's high-end real estate market in recent years. The Times focused on how many foreign (and U.S.) individuals “have taken steps to keep their identities hidden, registering condos in trusts, limited liability companies or other entities that shield their names.” Many foreigners are attracted to U.S. real estate, the Times said, because of domestic laws which “foster the movement of largely untraceable money through shell companies.”

What Is a Shell Company?

A shell company is not a distinct type of legal entity. It simply refers to any company used as a vehicle for some other business venture. It is a “shell” in the sense there is no business besides holding title to assets on behalf of the company's owners.

Shell companies are often associated with tax shelters and offshore tax havens. These involve using a subsidiary shell company to reduce taxes for a parent company. For example, Company A does business in a country with high corporate taxes. To reduce its tax liability, Company A establishes Company B, a shell company, in a foreign country with little or no corporate taxation. Company A then funnels some of its profits through Company B, potentially saving Company A a significant amount of money.

In the real estate context, shell companies are usually created to hold a particular property on behalf of the real owners. This can be a single person or a large group. As the Times noted, shell companies are especially useful when the individual owners wish to maintain a degree of anonymity or privacy. It can be difficult to determine the individual owners of a shell company from public records. In states like Delaware and Nevada, individuals can form a shell company without having to disclose the actual names of the company's owners or directors.

Many shell companies take the form of a limited liability company or LLC. The LLC is essentially a hybrid of a traditional business corporation and a partnership. They are especially useful in real estate transactions. A group of investors might form an LLC to purchase a single piece of real estate. The LLC affords the individual owners the same limited liability protection as a regular corporation. But, any profits or losses on the property are apportioned among the LLC members according to their operating agreement. That means profits are only taxed once—on the distributions to individual members—rather than twice, as they would be in a traditional corporation.

Should I Use a Company to Buy Real Estate?

Although many unscrupulous individuals might use shell companies to disguise illegal activity, as the Times series documented, there is nothing inherently unethical or illegal about using such entities in real estate transactions. Using an LLC or similar entity to purchase and sell real estate can have significant privacy, legal, and tax benefits. But, as with all complex legal transactions, before you decide to create an LLC, you should consult with an experienced New York real estate attorney. Contact our office today if you would like to speak with someone right away.