Companies creating new entities—for new businesses, subsidiaries, or expansion into new jurisdictions—face several challenges as well as a new federal recordkeeping law. Here we discuss the five biggest stumbling blocks businesses may run into, and how to avoid them.
In 2023, businesses formed 298,165 new entities in Delaware alone. While firms may have many different reasons for creating a new entity—launching a new business, branching out from an existing firm, or qualifying to operate in a new state—they all face the same common pitfalls. Those snares can delay your registration, cost you the name you want to use, or even risk heavy fines.
Creating a new entity doesn’t have to be rocky. With the right advice and close attention to detail, you can smooth the path to a new registration. In our webinar on “Steps to Entity Formation,” we covered five common traps you’ll want to avoid—and a new set of federal recordkeeping requirements you’ll need to heed.
Five snares for new entities
- Name conflicts: The first step in registering an entity in a state is to make sure that your preferred name is acceptable and isn’t already in use. States commonly prohibit use of words like “bank,” “finance,” trust,” or “insurance” unless the entity is licensed to deliver such services. CSC can conduct a name search to unearth identical or similar monikers already in use in a state. If your preferred name is in the clear, you can usually place a reservation on the name while you pursue registration. If there’s a name conflict, some states—including Delaware—will allow the name’s original user to grant consent for new uses. Be sure to obtain consent in the state’s approved format, with the proper signatures. (It’s also wise to check your name for potential trademark infringement.)
- Processing delays: Each state has its own deadlines and pace for processing registrations. As a general rule, it makes sense to pay a bit more for expedited handling. A registration in New York, for example, can take six months—or can be placed in 24-hour turnaround for a $25 fee. Even with expedited service, processing can slow down at the end of a month, a quarter, or a year.
- Document errors: The most critical step in avoiding delays is ensuring that your filings are completed precisely as required by the state where you’re registering. Delaware, for example, sets strict standards for who can sign documents, based on the entity’s corporate form. New York registrants are often rejected for failing to list the county where they’re located. It’s much easier to navigate these twists and turns with the guidance of an experienced corporate service provider like CSC.
- Getting the right documents: To qualify in a new jurisdiction, you’ll need to prove that your entity is in good standing and up to date on its tax obligations in other states. Producing the right documents requires understanding the differences among good standing certificates (short form or long, certified or not), and tax status certificates.
- Going overseas: Qualifying to do business abroad introduces new challenges to verify the authenticity of key documents. If the country you’re venturing into is a member of the 1961 Hague Convention Abolishing the Requirement of Legalization for Foreign Public Documents, that country will accept an American “apostille”—a certificate issued by a U.S. federal or state official certifying that your document is authentic. (The Hague Conference on Private International Law lists more than 125 countries that have adopted the convention.) For the 60 or more non-convention jurisdictions, you’ll need to get documents authenticated at the U.S. State Department and legalized at the other country’s embassy or consulate. Allow extra time for this complex process.
A new wrinkle—The Corporate Transparency Act:
The newest compliance hurdle for businesses is the federal Corporate Transparency Act (CTA), enacted to shine a spotlight on the ownership of shell companies and other opaque structures. Effective January 1, 2024, the CTA requires corporations, limited liability companies, and other entities to provide personal identifying information for individuals who formed, own, or control the company (company applicants and beneficial owners).
Deadlines for initial filings vary, but entities in existence at the start of 2024 must file information on beneficial owners by January 1, 2025. Willful violations may result in fines or criminal penalties.
You can find extensive information on the CTA’s requirements, along with an interactive quiz to determine whether your entity is a reporting company, on CSC’s Corporate Transparency Act website.
How can CSC help with entity formation?
Avoiding the pitfalls in entity creation isn’t easy. A skilled, experienced guide can be essential to navigate the process, track and meet deadlines, and avoid paperwork problems. With 125 years of experience operating in 140 jurisdictions around the world, CSC can lend invaluable knowledge and insights to your company with all its registration challenges.
CSC also offers extensive resources, frequently updated, on the CTA. Companies can use CSC’s Beneficial Ownership Interest (BOI) Filing service to prepare and submit BOI reports to the US Treasury’s Financial Crimes Enforcement Network (FinCEN). Find out how CSC can help.
