As organizations grow, they often add entities, also known as subsidiaries. However, if the business doesn’t have an accompanying entity management strategy in place, they could be in trouble. But what is entity management? Simply put, it is the practice of managing a company’s vital information and documents in an orderly system the organization can track and view, with the goal of keeping entities in compliance. Essentially, entity management is a discipline that requires the right technology.
What makes a good legal entity management system?
A good entity management system should accomplish three main things:
- Manage and keep your company in compliance with the numerous international, federal, state, and local requirements
- Manage data, documents, compliance, communication, collaboration, and reporting for all of your company’s entities
- Provide secure access to entity records to internal and external parties to create transparency
At its core, entity management keeps your organization in compliance with the numerous jurisdictional requirements by ensuring that important documents and deadlines are tracked across your company and its subsidiaries. As an organization grows in both size and complexity, so does the need for entity management. With so many jurisdictions across the country, one key question must be answered: How do you keep all those entities in compliance in accordance with the specific requirements of each jurisdiction?
With an entity management system, an organization can create a central repository of information to manage its data and documents. Entity data traditionally includes records of where entities are registered to do business, lists of officers and directors, and ownership records among other core vitals. Having data in a centralized database and documents in a searchable format allows an organization to get a complete and holistic view of all of its entity information. More importantly, it provides secure access to these records. By putting its records in a centralized and digitized format, the organization is able to protect them from both from a disaster recovery and data security standpoint.
Why do organizations have multiple subsidiaries?
Reason 1: Using entities to manage liability and exposure
Organizations establish multiple subsidiaries for multiple reasons. The most common reason involves separating and managing liabilities and exposure. But it’s ultimately about making sure that if an entity is facing some sort of litigation, there isn’t some sort of domino effect that can take down the entire organization. For example, if there is a major lawsuit against a single entity, the liability does not extend to other entities, so assets are protected.
Reason 2: Using entities to minimize tax burden
Another critical consideration in terms of why organizations create multiple subsidiaries is that there are different tax consequences for different entity structures or entity types. For example, it’s much easier to file taxes for a single member LLC as opposed to a for-profit corporation. Having multiple entities allows the organization to choose the entity structure that best suits its tax needs.
Reason 3: Using subsidiaries to alleviate or address regulatory considerations
Having multiple subsidiaries also allows an organization to sell, spin-off, or liquidate entities as they see fit. In some regulated industries, subsidiaries are established to hold specific licenses.
Why does entity management matter?
Despite the growing complexities, some organizations still might question the need to invest in entity management. However, entity management is now more important than ever before, so it is imperative that organizations get on board.
Entity management is crucial in today’s marketplace because:
- Regulatory complexity is increasing
- International, state, county, and local filing requirements
- Organizations need efficient access to entity records that are accurate and complete
Regulation plays a big role in the need for entity management. As more laws and regulations are added to the books, it is important that organizations keep a pulse of whether they are in compliance. If you’re doing this across multiple entities and jurisdictions, you need a powerful tool to manage everything and ensure that entity records are accurate and complete.
Additionally, the world is getting smaller. With the internet, companies are doing more business than ever across jurisdictional lines, which can often mean additional international, state, county, and local filing requirements. Entity management can help an organization stay on top of this.
Ultimately, entity management should not just be something that an organization’s legal department cares about. Other parts of the company, such as tax, finance, and treasury teams, should have visibility into this information, which is why a strong entity management platform that fosters collaboration across multiple divisions of the organization is necessary.
CSC is a leading provider of legal entity management solutions and can help your organization define and develop an entity management strategy. Learn more today.