What is entity management, and how can you streamline your organization’s approach?
Entity management cannot be defined in a sentence or two because it’s a complex system that involves many people and processes for each entity. Moreover, 55% of organizations have no legal entity management policies in place, highlighting the challenges many organizations face in tracking extensive corporate 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, this article will explain:
- What entity management is
- The role different departments play in the entity management process
- Why legal entity management is important
- Common challenges of entity management and how software can help
- Entity management best practices
Defining 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 organization.
Who is involved in entity management?
Legal entity management involves a corporation’s governance, compliance, 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 organization 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 organization chooses to put strong entity management at the center of its subsidiary management strategy, your organization 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 organization 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 organization. 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 organization.
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 localized expertise. For example, here are the varying regulations you would need to consider if you operated in the five following regions:
United Kingdom
Organizations 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 organizations 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 labor 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. Organizations 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 emphasizes corporate governance and board structure and has a growing emphasis on sustainability disclosures, which can be challenging for companies that don’t already prioritize 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 emphasize 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 organization 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 organization.
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 realize savings with higher quality, timely compliance and increased oversight without hiring additional staff to manage these tasks.
Evaluate Your Entity Management
How mature is your entity management? Download our guide to see where your organization falls on the entity management curve.
Discover more7 entity management best practices
Efficient and effective entity management saves time, avoids mistakes and makes it easier for your entities to achieve their business goals. If you aren’t up-to-date on entity management tools and best practices, your competition could pull ahead in this ever-evolving, complex global economy.
With that in mind, we offer five essential entity management strategies to incorporate into your governance operations:
- Centralize compliance, regulatory filings and record-keeping: Missing regulatory filing deadlines, ignoring compliance and sloppy record-keeping, at best, will slow your business growth and, at worst, can threaten the health and future of your business. Centralizing this data can ensure that stakeholders know what needs to be done and when and have the tools to execute their business functions.
- Adopt robust governance practices: Rigorous governance practices can help corporations keep up with entity management. Scheduling and documenting meetings consistently, ensuring compliance with local laws, and keeping transparent records are all hallmarks of good governance, and they are the same processes that will hold up to regulatory scrutiny in most countries.
- Support directors in their responsibilities: To stay competitive, your directors must possess appropriate expertise and skills and avoid conflicts of interest. Entities must ensure they comply with director independence regulations and restrictions on the number of directorships. Directors benefit from ongoing training about their responsibilities, potential conflicts of interest and governance tasks. Secure, ongoing and appropriate communication among directors, employees and shareholders is essential for directors to fulfill their ongoing responsibilities.
- Create a framework: Superior entity management doesn’t happen by accident. Your organization must construct a workable framework for all of your users so they can access the information they need. That also means that users are authorized to access information essential for their function but not information outside of this. An effective framework must start at the top. Key stakeholders, including board members and corporate secretaries, must buy into the process and the system.
- Prioritize data accuracy and security: Entity management is incomplete without data. Different countries also have different standards for data protection. Periodically auditing entity data to identify discrepancies and ensure accuracy promotes data integrity. This enables boards to make strategic decisions with the right information.
- Empower the corporate secretary: The corporate secretary plays a central role in corporate management, governance and compliance. Organizations that empower their secretaries to act proactively can stay ahead of the curve.
- Leverage technology for compliance: Technology can bring order to your entity management processes. It’s best to choose a solution that easily integrates with your existing systems and stays current as compliance and regulatory requirements evolve.
Simplify entity management
Download our entity management software buyer’s guide to find the best solution for your business needs.
Discover moreLeveraging software for legal entity management
Technology plays a pivotal role in streamlining entity management. Many common entity management challenges are baked into these software solutions, allowing corporations to get instant entity oversight from a single governance platform.
Legal entity management software can:
- Simplify compliance tracking: Corporate secretaries have the increasingly complicated job of tracking compliance deadlines across multiple jurisdictions. The more jurisdictions they manage, the easier it is to miss filings and penalties. Software automates tracking with centralized dashboards, reminders and alerts, ensuring timely filing.
- Streamline record keeping: Corporate records proliferate quickly, especially when corporations span the globe. The sheer volume of corporate documents, resolutions and board materials makes record-keeping both time-consuming and resource-intensive. By centralizing these documents and automating their storage and creation, legal entity management software simplifies the process and cuts the costs associated with it.
- Protect the organization legally: General counsels need timely and reliable information to ensure the company operates legally. This information is difficult to provide if critical documents are incomplete, inaccurate or difficult to access. Legal entity management platforms provide a secure, centralized repository for vital documents, such as statutory registers, contracts and governance documents.
- Provide global entity oversight: The C-suite and the board need real-time visibility into global entity status and compliance risk to make the best decisions for the organizations. However, scattered records and data can quickly create strategic blind spots. Analytics and reporting tools within entity management software offer high-level overviews of critical metrics, supporting better decision-making.
- Keep up with global tax systems: An organization’s tax function is essential to operating compliantly in any jurisdiction. However, tax heads too often struggle to manage the distinct tax systems in new jurisdictions and provide compliant and timely tax returns and other filings for each. The best entity management software helps tax heads visualize the company structure, quickly identify tax implications and stay on top of filing requirements.
Turn entity management into a standard business practice
Organizations need to have clear oversight and control over everything they do, which has made entity management an essential — yet complex — function.
Many boards know that they need to invest in entity management, but they don’t know how to streamline entity management so that it becomes standard in their organization’s day-to-day.
Discover even more about good entity governance and how to supercharge your growth and profits by implementing a technology-driven approach to entity and subsidiary management. Download the white paper from Diligent to learn more.
