Analytic Study of Legal Dimensions in Shell Corporations

Abstract

Under the temptation of personal interests, a partner might break the rules determined by law to create an appropriate environment for the commencement of a commercial activity. In order to achieve this activity, he strives to establish a commercial company that he owns by himself without having partners. By taking such action, he is violating the law, which says that a commercial company
shall have at least two partners. A memorandum of association, indeed, is a contract between two persons or more who participate in an economic project. One of the main objectives of this project is to achieve profit. Partners, when signing the memorandum of association, shall provide a share of money or work, and accordingly, they share the profits or losses that result from this agreement (See Federal Commercial Transactions Law, 2015). Sometimes when the economic project is so huge and requires a large capital investment, a partner may resort to establishing a shell company as a legal entity enacted as per the procedures identified by the Commercial Companies Law. These procedures include registration, publicity, and taking one of the specified forms of a company, such as a solidarity company, a simple recommendation firm, or a private shareholding company. However, the truth of this company
is completely different from the apparent situation. Indeed, the owner of this firm is only one person, and thus violating one of the essential rules of establishing a company. To avoid this problem, the owner finds an alternative within a legal framework to solve the partners’ issue, which is required by the companies’ law in most legislations, and that is through the establishment of a shell corporation. However, the non-deniable fact is that the reality of having partners remains imaginary. Simply because a shell company is owned only by one person. The real motivation behind the establishment of this type of company lies in a number of reasons. First, the owner is incapable of owning the business only by himself as per regulations. Secondly, the inability to obtain certain banking facilities, and finally, the owner could be a foreigner who is prohibited by national law to own a commercial enterprise alone.
This trend seems to raise a number of problematic issues. For instance, one might wonder about the degree of liability of imaginary partners for the debts of the company. Another issue is the effect of the company’s actions on third parties who have no idea about the reality of the company, that it is a shell corporation. This misleading situation shall indeed violate the commercial credit element.