What is Legal Entity Management?
General counsel, business lawyers, and corporate paralegals serve a vital role in corporate compliance. Without their diligence, the corporate veil would blow away in the wind. The exceptional growth in new legal entity formation and the increasing diversity of corporate forms challenges even the most organized corporate legal team. Legal entity management is a set of practices and tools that allow general counsel and corporate legal teams to preserve the corporate veil, manage risk, and deliver value.
Benefits of legal entity management
Legal entity management is a discipline aimed at three objectives.
Photo by Ken Treloar / Unsplash
1. Ensure compliance for each entity and jurisdiction.
Corporate compliance starts, but does not end, with registered agent services. Legal entity management promotes compliance by brining all corporate filings together in one place.
Legal entity management also allows us to track, for example:
- Securities filings
- Assumed business name registrations
- Foreign authorization registrations
- Special licenses or permit tracking
- Agreements and documents for maintaining tax status
Effective legal entity management treats every national and subnational or regional jurisdiction equally. A corporation incorporated in Delaware and operating in California may have subsidiaries in British Columbia, Canada, and Singapore.
General counsel, corporate lawyers, and paralegals should view all of the filings, licenses, and registrations from those jurisdictions in one place.
2. Manage legal entity risk
Legal entities reduce risk by isolating potential liabilities in discrete companies. This benefit assumes that the corporate veil remains intact. Legal entity management is a tool to manage the legal risk associated with the organization’s corporate form.
Legal entity management is a set of practices and tools to identify and manage corporate risk early when it is easier to handle.
3. Communicate the value of the corporate legal team.
To fend off budget pressure, legal teams need to demonstrate value, not just complain about their work load. Very few organizations are eager to spend more money to grow the legal department. Therefore, it is imperative that lawyers “Do more with less.”
Done right, legal entity management allows general counsel, business lawyers, and paralegals to share data and analysis with management to reveal both the risks and the benefits for legal risk management.
How to manage legal entities
To manage legal entities in an era of increasing complexity and responsiveness requires five steps: centralize all entities on corporate registry, track ownership details for each entity, manage officers and directors, store corporate documents with the entity details, and adapt to changing corporate forms and laws.
Complete corporate registry
The corporate registry must show all your entities in a single view, regardless of the type of legal entity or jurisdiction of incorporation. The registry should show the legal name, any trade name, next renewal date, entity type, and tax classification.
Track ownership
Legal entity management includes staying on top of who owns how much of each entity. Some ownership data is simple:
Company A owns 75% of Company C
Company B owns 25% of Company C
In the case of entities that have a detailed stock ledger (or the equivalent for partnerships and LLCs), entity management becomes more complicated. We need the full transaction history, an automated capitalization table (“Cap Table”), and org chart.
Manage officers and directors
Send notices to current directors about board meetings is routine work for corporate secretaries. Legal entity management requires active work with data about officers and directors.
For example, general counsel, business lawyers, and corporate paralegals need to quickly answer questions like: “Who was on the board between May 1, 2009, and August 15, 2010?” Effective legal entity management means the answer is a few clicks away without opening any files.
Corporate documents
It is also routine, to keep Articles of Incorporation, By Laws, and other organizational documents handy. Since legal entities are an important part of risk management, we need to track many other documents like Directors and Officers insurance (D&O) policies, Errors and Omissions (E&O) policies, regulatory filings, licenses and permits in our legal entity management software.
Adapt to changing laws
The laws changes. New regulations, updated requirements, and new filings proliferate, usually without relief from existing obligations. It is critical that the legal team respond to these changes quickly.
Legal entity management is also about people management. We need to assign tasks to colleagues in the business and in the legal group. We need to collaborate effectively to keep the organization in compliance.
Before our D&O policy is up for renewal we might want to have the risk department shop for a new policy forty-five days before the policy expires. We might want Human Resources to send the executive succession plan. We might need to alert outside counsel in one jurisdiction to take care of a new filing requirement. These are all tasks of legal entity management.
Conclusion
General counsel, business lawyers, and corporate paralegals can make a tremendously positive impact on the broader organization with effective legal entity management. However, to make an impact requires an expansive view of what it means to manage legal entities and to communicate proactively with our colleagues.