United States: Doing Business In The US: Entity Management And The Corporate Transparency Act

The Corporate Transparency Act (CTA) is set to take effect from 1 January 2022. This legislation will mandate new federal ultimate beneficial owner (UBO) filing requirements for certain new entities, as well as existing entities that are, or will, be active on the secretary of state level.

While the US remains a popular market for companies looking to expand their businesses, the increasing size and scale of regulatory demands present significant new challenges to businesses. Legal requirements vary on both a federal and state level, and maintaining good governance in the wake of new requirements can be a real challenge to those operating in the US, as well as to those entering the market for the first time.

Entity governance procedures can be tough to manage in many cases, but an entity being registered in multiple states – which is often the case for large institutions – is the common denominator in most complex entity management scenarios in the US.

Incorporating in the US

Getting an entity up and running in the US is a relatively straightforward process, especially when partnering with a reliable corporate services provider or registered agent. The timings for filings can vary, and could take anything up to several days to obtain the necessary filing evidence, due to each state having its own requirements for different types of entity. 

In order to receive the best legal and tax advice before proceeding with the actual incorporation or company formations, it is best practice to liaise with counsel and a tax advisor for each new entity being established.

The complexity of registering in multiple states

The various US secretaries of state strive to make the management of entities easy, but keeping track of varying requirements across 50 separate state jurisdictions and territories is a complex task for organisations.

Each state or territory has its own laws and guidelines, and each also has its own corporate entity rules and regulations around annual reporting requirements and franchise tax submissions. This can be a lot for companies to manage by themselves, highlighting the benefit of having a committed and organised corporate service provider or registered agent, in order to help preserve an entity's good standing.

TMF US monitors and tracks all deadlines in each of the US states and territories, presenting a business model that automatically keeps entities compliant for the long term. Within our practices, we track new and changing legislation, and any related governing procedures, forms and other actions taken by the secretaries of state, to help ensure filings are submitted on time and without issue, and avoiding any unnecessary penalties or fees.

Changing requirements: the Corporate Transparency Act

In the last ten to 15 years, corporate America has endured financial crises, a pandemic and civil unrest; but not without an impact on the economy. With each change, many companies have reacted by downsizing their staff, which has resulted in governance neglect and out-of-date minute books, all at a time when corporate transparency is increasing. 

For the first time in US history, all active entities registered at the secretaries of state, that meet certain criteria, will now also need to submit reports to the Financial Crimes Enforcement Network (FinCEN) at the time of incorporation or formation, or run the risk of facing severe penalties. After 1 January 2022, newly formed entities, and existing entities established within two years of this date, that meet the requirements of the Act, will be required to make disclosures to the Department of Treasury, specifically to FinCEN, regarding beneficial ownership as outlined in the Corporate Transparency Act (CTA).

The CTA defines beneficial ownership as a natural person or person(s)... "...who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls not less than 25% of the ownership interests of the entity..." and it is designed to accelerate the process of identifying criminal activity.

TMF US is working to keep all of its clients aware of and updated on this upcoming requirement so, when the Act becomes law, those we advise will already be very familiar with the requirements. We believe everyone who deals with company information, qualifications, incorporation and minute book details or governance needs to be familiar with the CTA.

Penalties for non-compliance

The CTA has substantial civil and criminal penalties for failure to report and disclose information properly. Willfully providing or attempting to provide false or fraudulent beneficial ownership information to FinCEN, or willfully failing to file complete data, may result in civil penalties of up to $500 per day, criminal fines of up to $10,000, and potentially imprisonment for up to two years. Penalties for unauthorised disclosure of UBO information by government employees include up to five years in jail and fines of up to $250,000.

It is important to note there is a safe harbor covenant which allows for incorrect reporting to be corrected within 90 days, provided the company reporting is not attempting to evade reporting requirements.

While many companies will be required to report to FinCEN, there are a series of exemptions that allow companies of a certain size or type, including publicly traded companies, financial institutions, non-profits, to opt out. TMF US strongly recommends that anyone with active entities discusses the CTA with their legal counsel to definitively determine whether their company is required to report to FinCEN or may be exempt from filing UBO information.

Talk to us

TMF Group's US-based entity management services can help you remain compliant with local legislation and UBO requirements. Our comprehensive offering provides a long-term solution amid constantly evolving governance requirements.

TMF Group manages UBO information and reporting as a standard practice within all our global markets. Our in-house global entity management and governance experts, operating in more than 80 jurisdictions, are prepared to assist with the new UBO compliance requirements in the US, and anywhere else you do business.

If you need assistance with any aspect of your US entity governance, or with UBO compliance, make an enquiry today.