A dummy corporation, otherwise known as a dummy company, is one which appears to be an actual company. However, it is primarily established for the purpose of concealing one or more companies. As such, it is not capable of operating on its own.
Aside from concealment of the true identities of real companies, dummy corporations also function to aid them in avoiding taxes. By creating such entities, companies may be able to mislead the public regarding their actual financial condition.
Dummy corporations may also be created due to political reasons. If, for example, a company intends to embark on a specific financial strategy but has reason to believe that other entities might block such developments, it may deflect attention from itself by letting the dummy corporation act covertly on its behalf.
In certain situations, special interest or cause-oriented organizations may also set up dummy corporations in order to advance their cause. Governments can also engage in such activities, either for intelligence gathering or to advance an economic objective.
The term “dummy corporation” is sometimes used interchangeably with the term “shell corporation.” However, a shell corporation is, more specifically, one which facilitates transactions even though it does not have its own assets. Such corporations usually flourish in the underground economy, but they are not illegal by nature. Shell corporations are also created for tax avoidance purposes. By buying or selling assets through a shell corporation, usually one based in a tax haven, a company may be able to avoid paying taxes. Such transactions are not included in financial reports of the actual company.