Entity management is a complex task that involves various people and processes. In fact, about 55% of organisations worldwide don’t have proper policies in place for managing legal entities. This shows the difficulties many businesses encounter in keeping track of their important records.
The intricacy of legal entity management is precisely why many corporations fall down on the job when it comes to managing all aspects of the corporation and its entities, sometimes getting themselves into trouble with compliance matters.
To help you better understand entity management and how it can position you to prevent costly compliance missteps, part 1 of this blog series will dive into:
- What entity management is
- The role different departments play in the entity management process
- Why legal entity management is important
- The benefits of better entity management
What is entity management?
Entity management (or ‘legal’ entity management) is the collection of a business’s corporate record. This can be defined as information that details anything, including business changes and structure. More specifically, it provides information regarding mergers, acquisitions, corporate names, legal structures, owners, and directors.
In short, entity management is creating a single source of truth to better manage the evolution of compliance and tax regulations, unknown regulatory changes, and associated costs for all legal entities within an organisation.
Who is involved entity management?
Legal entity management involves a corporation’s governance, compliance, and tax and legal departments, including the general counsel, corporate secretary, paralegals, and all tax department members.
Most, if not all, entity management duties of these departments include:
- Regulatory compliance
- Administrative maintenance
- Monitoring of internal record-keeping
The above departments manage the inflow and outflow of information, reports and documents that inform the corporation’s transactions and filings.
In addition to significant internal corporate departments, many employees, such as managers, board directors, audit committees and regulators, regularly request corporate data throughout the business week.
Why is legal entity management important?
Entity management is important because it’s central to compliance. Any legal entity, your organisation included, must walk a fine line to adhere to local, state and country laws. In order to make sure that your operations don’t violate any rules or regulations, it’s imperative to understand how corporate entity management helps you remain compliant.
- Proactive governance reduces reactive compliance: If your organisation chooses to put strong entity management at the centre of its subsidiary management strategy, your organisation will more easily comply with regulations as you expand your operations regionally or globally.
- Cut down on risk: This approach will help you reduce risk for your legal subsidiaries, and this should save your organisation a lot of time with financial, legal, environmental, reputational and safety matters for more streamlined governance.
- Create a single source of truth: Different departments may handle different types of data, but they all need visibility into the entire organisation. When you rethink the process of entity management, legal, HR, tax and finance teams will have access to the right data at the right time to address risks more quickly.
- Make data more actionable: More data is only better if you have the right resources to manage it, primarily because data decays over time. Legal entity data management puts your teams in a more strategic position because they can turn data into insights and then deliver those insights to senior leadership and the board — enabling more informed decisions across the organisation.
Global entity management
The complexity of entity management is due, in part, to the global nature of corporations today. Many entities operate across borders, each new locality enforcing distinct regulatory requirements. Modern global entity management requires compliance with varying regulations and a deep understanding of jurisdiction-specific nuances.
However, making the most of those opportunities requires companies to have both entity-wide oversight and highly localised expertise. For example, here are the varying regulations you would need to consider if you operate in the five following regions:
United Kingdom
Organisations in the UK must submit annual filings with the Companies House, adhere to the Companies Act of 2006 and maintain statutory registers. Additionally, Brexit has had implications for cross-border trade and reporting, adding another layer of complexity to UK-EU operational strategies.
France
France requires organisations to file annual financial statements with the Commercial Court. You must also adhere to French Commercial Code regulations. The country is also known for its complex labour laws and collective bargaining agreements, requiring great care to comply with employment matters.
DACH regions (Germany, Austria and Switzerland)
This region has its own stringent compliance requirements associated with their designations for limited liability companies, which include the German GmbHG, Austrian GmbH Act and Swiss CO. Regular audits and filings are critical for each of these entity types. This region is also known for its distinct tax frameworks and emphasis on financial transparency. Organisations that operate here must also be prepared for varying language and documentation expectations by country.
Japan
To operate in Japan, you first must register with the Legal Affairs Bureau. You must then file taxes according to the country’s regulations and comply with the Companies Act of Japan. This region also emphasises corporate governance and board structure and has a growing emphasis on sustainability disclosures, which can be challenging for companies that don’t already prioritise environmental, social and governance (ESG) issues.
Australia
Australia also has unique reporting and filing requirements. These include regular updates with the Australian Securities and Investments Commission, adherence to the Corporations Act of 2001 and tax reporting under the Australian Taxation Office. These reporting requirements also emphasise environmental and corporate social responsibility practices.
Challenges of entity management
Entity management can be challenging, not just because of the sheer amount of information companies must manage. Many key members of the organisation will also request that data, which complicates the task even further.
Some other entity management challenges include:
- Operating across jurisdictions: Legal entity data management is often complicated by the nuances of global tax systems, differing price regulations and reporting requirements, the need to navigate local customs and languages and more. This can quickly drain legal, financial and operational resources as employees struggle to adapt entity management processes in one country to the expectations of another.
- Corporate secretaries and paralegals need entity data in real-time: Corporate secretaries and paralegals get bogged down with requests for hundreds of documents daily, many of which are time-consuming to access because they are heavily encrypted and have unique data points. More importantly, they need a lot of the data in real time, which isn’t possible in many cases unless the company has sophisticated systems. Corporate secretaries also play an important role as advisors, so having a formal system gives them faster access to documents and data.
- The breakdown of information-management requirements: Because many people, departments, and processes need or manage corporate data, it helps to assign which people or departments are responsible for maintaining certain pieces of information. Every corporation has unique operating needs, so this breakdown of duties will vary by organisation.
Benefits of better entity management
Nearly 50% of companies still rely on spreadsheets to oversee their auditing and controls, but managing entities is complex. Streamlining entity management is becoming a viable and popular way to manage entities efficiently and effectively.
In the governance world, having the right tools, insights, and analytics is the only way to gain a competitive edge, remain compliant and ensure all entities follow local jurisdictions.
But that’s the first of many benefits to strengthening your legal entity management program. Other benefits include:
- Increased access to data: Software programs for entity management develop a system of storage, cycles and notifications. These systems allow multiple parties to access the information they need while disallowing users who don’t need access to information.
- Reduced human error: Software solutions specifically for entity management can respond strategically while keeping costs at bay. Automation alleviates some of the intensifying compliance and regulatory pressures related to human error.
- Streamlines operations: Multifaceted systems manage complex needs much more efficiently and accurately than multiple staff in multiple departments can do on their own.
- Cuts costs: While there is an investment in the system and in managing the system, corporations will realise savings with higher quality, timely compliance and increased oversight without hiring additional staff to manage these tasks.
Make the most of entity management
In today’s business landscape, organisations need oversight and control, making entity management an absolute necessity. Around the world, boards are investing more and more into entity management, making it central to their day-to-day operations.
In addition, while the basics of entity management have been covered, there is far more than meets the eye. Dig deeper with part 2 of this blog series that covers the best practices of entity management, packed with tips and tricks to elevate governance. Read it here.