A shell corporation is a company which serves as a vehicle for business transactions without itself having any significant assets or operations. Shell corporations are not in themselves illegal and have legitimate business purposes. However, they are a main component of the underground economy, especially those based in tax havens. They may also be known as international business company, personal investment companies, front companies, or "mailbox" companies.
A classic tax avoidance operation is based on the buying and selling through tax haven shell companies to disguise true profits. The firm does its international operations through this shell corporation, thus not having to report to its country the sums involved, avoiding any taxes.
An example of a legal use of a shell company is a supplier of store brand groceries that sets up a shell company when dealing with a hard discounter like Aldi. By obscuring its business relation with the discount chain, the supplier prevents diluting the value of its main brand, which sells at much higher prices.
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Shell corporations have been used to commit fraud, by repeatedly creating an empty shell corporation with a name similar to existing real corporations, then running up the price of the empty shell and suddenly selling it (pump and dump).
The type of "shell corporation" described here should not be confused with a "Shell" company which is a specific term used by the U.S. Securities and Exchange Commission to refer to a publicly held company with no or nominal assets other than money.[1]