The importance of legal entity management
We've discussed many different aspects of entity management before in this space. Briefly put, entity management is a method of integrating corporate duties like regulatory compliance, administrative maintenance, monitoring of insider trading and internal record-keeping activities.
It involves an organization's governance, compliance and legal departments, which manage the flow of information in and out of a company, as well as producing documentation and reports that can inform every transaction and legal filing. People began to talk about legal entity management (LEM) as a specific subset of entity management science back around 2013, when the Organization for Economic Cooperation and Development (OECD) adopted its Action 13, which included a number of new rules for the implementation of country-by-country entity reporting in order to start getting a handle on actions that were deemed to be profit-shifting to avoid taxation, which contributed to erosion of the individual OECD countries' economic bases.
Since then, we've seen Brexit, which has forced companies to establish legally distinct entities at the British and European levels, and President Trump's new tax law, which commits the US federal government to cracking down on profit-shifting like never before. These and other major policy shifts in a climate of global political turbulence make developing a specific legal strategy of entity management incumbent on multinational organizations. In this post, we break down some of the basics of such a strategy.
Q: What is Legal Entity Management and how does it differ from ordinary entity management?
A: Legal entity management is a strategy for handling regulatory compliance and administrative maintenance on an ongoing basis, particularly the functions typically handled by the legal, compliance and/or governance departments. Financial regulations in the US, Europe and worldwide enacted since the financial crisis of 2008 imposed new recordkeeping and reporting requirements, among other things, which greatly increased the complexity of what organizations are expected to monitor and report on to their leadership, governments and shareholders. For example, it's normal for the legal department of a multinational company to have to field dozens of requests in a single day about the details of ownership for international entities when leadership is planning a reconstruction or an expansion. Legal entity management keeps all of this data in one place, at the fingertips of the people who need access to it. It also helps companies stay up-to-date on their fiduciary, regulatory and statutory responsibilities; gives the leadership advice on the best practices of corporate governance; and actively maintains the corporate records of all transactions, filings, reports and audits.
Q: What are some aspects of a sound Legal Entity Management strategy?
A: There are three essential prongs of a good LEM strategy: 1) ensuring compliance, 2) risk management and 3) valuation of the legal team.
- Ensuring compliance: Legal entity management brings all corporate filings together, in addition to the registrations of assumed business names and foreign authorizations, special licenses and permits, and documents for maintaining tax status. The general counsel, corporate lawyers and paralegals should be able to access all of these for every national and subnational jurisdiction from a single repository.
- Risk management: The purpose of creating separate entities within a multinational organization in the first place is to isolate potential legal liabilities to discrete bodies. This is what's called the 'corporate veil.' Managing legal risk entails both keeping the veil intact and implementing the best practices to identify and mitigate liabilities.
- Valuation of legal teams: Legal departments of multinational enterprises almost invariably complain of being overworked and understaffed compared to what's asked of them on a daily and ongoing basis. Having a LEM strategy to share and analyze data helps legal departments to 'do more with less.'
Q: How can technology assist my organization in developing a Legal Entity Management strategy?
A: A reliable technological platform is the essential basis for the effective monitoring and response to legal responsibilities and risks. More and more companies are turning to outsourced software solutions in entity management, generally because they don't want to spend time or money unnecessarily reinventing the wheel. Software programs for legal entity management are developed systems for storage, cycles and notifications. They allow multiple parties to access the data they need while assigning permissions based on rank and responsibility. A customized platform that automates legal compliance reduces the risk of human error, helps the legal and leadership teams work more effectively, and realizes higher savings and quality in the long run. Blueprint OneWorld offers these and many other features to customers of its entity management platform. Please call or email us today so we can start putting it to work for your organization.
