why is creating a shell corp better? Such as Meta, Alphabet, X Corp etc?


why is creating a shell corp better? Such as Meta, Alphabet, X Corp etc?

In: 3

I’m not sure I understand your question? Shell companies are inactive companies used for financial manoeuvring. Often illegal or immoral things like tax dodging.

Meta and Alphabet are holding companies. Companies that own more companies. These are used to protect the company and investors. The various companies owned by a holding company cannot be held liable for another’s debt. So if Facebook got sued for 100 billion and couldn’t pay it, Instagram wouldn’t have to pay the rest.

You probably mean holding company. (Shell company has a different connotation). This isn’t a complete answer that would get you an A in class but might get to the basics. (This is a very complex subject)

a) Business Strategy. Many companies grow horizontally. This could mean entirely new areas of business unrelated to their core business. Quite often this is done through acquisitions. In terms of acquisition, it is often simpler to keep the acquired company separate (at least initially) under a holding company. Also hiring and holding on to existing staff, premises etc might be easier done this way.

b) Tax management. This is a long and complicated subject. There are advantages to parking some assets and do some transfer pricing, internal licensing etc. The subsidiaries are set up in tax advantaged locations (eg Ireland, Cayman Islands etc)

c) Regulatory Compliance. Most countries require a company to be registered locally (which can be a wholly owned subsidiary) for sales to happen in a country. Naturally, the government wants oversight, local taxes paid, etc. Also it becomes a lot easier to do business – set up bank accounts, hire local staff, rent buildings, buy insurance etc. – when there is a local subsidiary rather than trying to do this directly from the home country. Certain types of firms/products have separate regulatory oversight, a good example being medical devices and pharmaceuticals. Rather than subjecting the entire company to compliance, having a subsidiary specifically for the sake of compliance makes sense.

d) Liability management. Internal firewalls for liability considerations. If one part of the company makes weapons while another part makes video games (for example), it is preferred (and much cheaper to insure) to have a subsidiary company to limit liability.

e) Organizational alignment. Especially with (a), it might make sense to organize very separate businesses separately. This allows for differentiated salary policies, bonus structures, organization hierarchy based on the needs of the specific business division.

One reason is so that a company can diversify its finances in different operations so that if one does really badly, the other profit making business operations don’t get affected.