United States: Managing Entities In The US: How To Minimise Risk In A Changing Environment

Creating and managing entities in the US is an attractive proposition, but new legislation will mean new and existing entities have to be more transparent to the Department of Treasury. What are the opportunities and challenges?

The United States is one of the simplest places in the world to do business, according to TMF Group's 2021 Global Business Complexity Index (GBCI), with state level rules and court systems making things easier. However, companies must tread carefully when creating and managing US entities to avoid falling foul of changing regulations.

The GBCI ranks the US 71st out of 77 jurisdictions in terms of business complexity, providing a compelling case to register entities in this part of the world compared to jurisdictions in which there are more burdensome reporting requirements, such as Latin America and parts of Asia.

Corporations move towards registering in the US due to the comparatively corporate-friendly legislative environment. The incorporation process is straightforward compared to many other countries.

State and federal challenges

However, it is not all plain sailing. New and existing entities must comply with both federal and state requirements to keep entities in good standing and minimise risk. It is also important to navigate legal and tax regulations that will vary by state.

Not surprisingly, all states present different advantages when it comes to setting up and maintaining entities, with Delaware being particularly popular given the benefits of the Delaware Court of Chancery and the Division of Corporation's ease of process when incorporating.

While registering an entity at the Secretary of State in the US is fairly straightforward, ongoing entity management can present its own challenges given that every state has different requirements when maintaining entities over time.

It is important to mention that new federal requirements are coming into play for US entities – new and existing – who have, until now, only had to consider state requirements when incorporating new entities. The Corporate Transparency Act (CTA), set to take effect no later than 1 January 2022, adds a layer of complexity to the equation.

The CTA obliges companies that meet defined criteria to report beneficial ownership information for US entities to the Financial Crimes Enforcement Network (FinCEN). The new legislation is being introduced in a bid to counter money laundering, the financing of terrorism, and other forms of illicit financing activity. The CTA also presents a set of strong civil penalties of up to $500 per day and criminal fines of up to $10,000, imprisonment for up to two years, or both, for non-compliance.

The good news is there are exemptions within the CTA which defines the types of entities that may not be subject to these filings. Current exemptions include: entities that employ more than 20 employees, filing federal income tax returns demonstrating $5 million in gross receipts or sales, and have a physical operating presence in the US.

In future entities and their owners will benefit from partnering closely with their governance experts to validate whether their companies and subsidiaries are subject to these requirements or exempt and take the required steps toward compliance.

Minimising risk

Minimising long term risk on state and federal levels is a paradigm shift for US entities which are familiar solely with shorter term requirements. Taking on and adhering to these new requirements could be difficult to navigate.

With increasing requirements focused on entity transparency, and in the midst of growing US compliance requirements, companies doing business in the US must take a fresh look at their existing structures so that they are fully prepared for changes when they become law.

Keeping track of legal entities and their related registrations, wherever they sit, is strongly recommended as a first step towards comprehensive governance management. Conducting an entity health on all registrations will help define any action items at the Secretary of State while also having the added benefit of validating which entities may be subject to the CTA filings to FinCEN. 

Furthermore, long range governance planning will futureproof corporate structures. As the regulatory landscape changes, it will be easy to lose track of changing legal and tax requirements. Careful planning, strong governance and a clear strategy will go a long way to navigating increasing regulatory changes and toward minimising risk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.