Guide to Entity Management
Managing legal entities efficiently is critical for general counsel balancing legal, risk management, and leadership responsibilities. This paper provides a comprehensive review of entity management as a legal practice and entity management software as a tool from the perspective of the general counsel and in house legal team.
Common Information for All Entities
Entity management provides a consistent framework for general counsel to manage legal entities formed in any jurisdiction whether private or public, for-profit or not-for-profit, and in any industry. An entity management framework creates a consistent view of legal entities notwithstanding the variations.
Common information about legal entities might include:
- Legal name,
- Form of organization (such as Corporation, Limited Liability Company, etc.),
- Address (legal and/or principal place of business),
- Registered agent, and
- Date of incorporation.
Legal entities also have documents and records, compliance and filing requirements, owners and investors, and officers and directors.
Using a consistent approach to legal entity management makes in house legal teams efficient and effective. The corporate registry becomes simultaneously more powerful and easier to use.
Corporate Documents and Records
Objectives for Corporate Document and Record Management
Corporate document problems grow exponentially with the addition of even a handful of legal entities. The age of each entity, its jurisdictional footprint, and the types of documents all exert pressure on corporate legal document management.
For each document or record, we need to factor in four elements:
- Time and duration. Does this document have an effective or start date? Does it have an expiration date?
- Jurisdiction. Does the document relate to a particular jurisdiction, whether that is national or subnational?
- Classification. What type of document is it? What is the right way to classify corporate legal documents?
- Frequency. Is this a one-time document or is it one of many over the life of the legal entity?
These are often easy questions for a single document. The challenge is to design a system for managing all legal entity documents for the entire corporate family in a consistent, orderly way that improves corporate compliance and reduces risk.
There are four helpful examples: organizational documents, filings, meeting minutes, and agreements.
Organizational documents consist of all those documents that are necessary to create the legal entity in the jurisdiction which is the principle place of incorporation.
The corporate lawyer must immediately decide whether organizational documents include the bare minimum to complete the incorporation or the entire document package with agreements by and between the founders.
Effective entity management solutions allow you to classify organizational documents as broadly or narrowly as you want. For example, all initial documents could be placed in an “Organizational Documents” bucket while each individual document has a different document type.
Types of organizational documents might include:
- Articles of Incorporation,
- Ownership Agreement (covering shareholders, partners, or other equity holders),
- Resolutions, and
- Employment (option plans, employment agreements, etc.).
Notice that not all of these are strictly required to incorporate in many jurisdictions, and they might not be sufficient in some. The point is to differentiate between types of organizational documents.
One of the reasons to draw these distinctions is to help with expiration dates. Some ownership agreements and employment documents might have expiration dates; others do not. Entity management software must show organizational documents with expiration dates and automatically send notification about the impending expiration.
From inception to dissolution, entities must file with jurisdictions relevant to their operations. All those filings should be in one place. Each filing can have its own expiration and its own jurisdiction.
If a Limited Liability Company incorporates in Delaware and has its principle place of business in Texas and then expands to other states, it will likely need to register as a foreign corporation in those states.
The LLC might maintain one or more trade names (Doing Business As or DBA name) in some of those jurisdictions. The filing requirements can vary among jurisdictions further complicating the tracking, for example:
- Jurisdiction A: Filing date 2/1/2018, Expiration date 2/1/2019 (1 year period).
- Jurisdiction B: Filing date 3/15/2018, Expiration date 3/15/2020 (2 year period).
- Jurisdiction C: Filing date 4/25/2018, Expiration date 4/25/2023 (5 year period).
These jurisdictional filings might be at the state or provincial level, or at the national level.
In addition, many organizations have special purpose filings based on their tax status, form of organization, or jurisdiction. Appointment of local directors might require a filing in some countries.
Filings proliferate quickly for general counsel. Legal entity management keeps filings organized, but more important notifies general counsel automatically of upcoming filing deadlines.
Meeting minutes are another type of document that grows quickly. Imagine the implications of a few business structures and meeting frequency over five years.
Small or Medium Enterprise with 5 Operating Entities 5 committees and the board X 4 meetings X 5 entities X 5 years = 500 meeting minutes One Board, No Committees per Board, but Active Boards 1 board X 8 meetings (regular and special) X 5 entities X 5 years = 200 meeting minutes Private Equity or Holding Company Portfolio 1 board X 1 meeting (annual) X 200 entities X 5 years = 1,000 meeting minutes
Obviously, these examples are not representative of every or even any organization. The examples do demonstrate rapid growth in meeting minutes with increases along just one trajectory: boards and committees, number of meetings, number of entities, and number of years.
Meeting minutes have a date, but not an expiration date. Under most circumstances, meeting minutes do not relate to a jurisdiction, but they might in some cases. So entity management needs to separate meeting minutes from other corporate documents and track the right kind of data about the meeting minutes.
Organizations form legal entities in large part to enter contracts and to manage risk from those contracts and related operations. Contract management goes beyond entity management. Still, some agreements are indispensable to the general counsel’s oversight of the legal entity.
For example, all ownership agreements, such as shareholder agreements for corporations, membership agreements for limited liability companies, or partnership agreements for general, limited, or limited liability partnerships, must be readily available to general counsel in the entity record.
Intellectual property ownership and license documents that are critical to the company should usually be part of the entity record as well.
Important entity documents might also include intracompany agreements for tax or other purposes.
Directors and officers insurance (D&O) and errors and omissions (E&O) can be grouped under this agreements umbrella, provided that the entity management scheme for documents has a separate type for “Insurance”.
The same tactic for distinguishing between flavors of organizational documents works for agreements too. Adding document types labelled insurance, ownership, and intellectual property, easily solves this document management problem posed by corporate agreements.
Why bother to store key agreements with the entity record in the first place? There are two answers. First, it makes the general counsel’s job simpler. All the data and documents for a single entity are always in the same place.
Second, corporate functions of the general counsel go beyond storage and filings. The general counsel is a risk management leader for the organization. Entity management is a critical legal risk management tool, because it notifies the legal team of important due dates and expiration dates automatically.
Compliance and Filing Requirements
Objectives of Corporate Compliance and Filing Requirements
A legal filing is both a document and an event. As a document, it has a name, a filing date, an expiration date, and a jurisdiction. That information is necessary for legal document management. However, filings are also more than mere documents.
Filings are events with deadlines. Late filing is, at best, a hassle; at worst, a trigger for fines and penalties. Filings are an artifact of effective corporate compliance by the general counsel’s office.
Legal filings and compliance tasks generally require action. Compliance is a set of prohibited, permitted, and required actions. Entity management provides a mechanism to record, assign, and track completion of compliance requirements.
General counsel can derive more insight from legal entity management by classifying requirements.
There are three examples to illustrate how entity management can facilitate compliance: annual reports and statements, regulatory filings, and government permits and licenses. It is certainly conceivable to devise a more gradual classification scheme to include requirement types, like tax obligations, reporting requirements, or even reference to specific statutory or regulatory provisions.
Annual Reports and Annual Statements
Annual reports (or annual statements) are the most basic legal entity requirement. Almost every national or subnational jurisdiction requires that a legal entity renew its incorporation status periodically. The renewal period is often annual, but it might be a longer duration.
The annual report pertains to a jurisdiction. Some entities might have to file more than one annual report depending on the jurisdictions in which they do business. Entity management needs to support assigning an annual report or renewal filing with a particular jurisdiction.
Countries around the world impose compliance obligations on companies operating in certain industries. Healthcare firms must track provider licenses and file reimbursement and procedure information. Transportation companies must supply wage and hour data to compliance with restrictions on drivers, engineers, and pilots. Manufacturers and distributors confront environment reporting requirements regarding production and transportation of hazardous materials. Financial services firms must navigate banking, insurance, and securities rules. Just to name a few examples.
Compliance obligations which pertain to a legal entity can be monitored with entity management practices. There are two steps to using entity management to monitor regulatory filings.
Step 1. Classify Requirements by Type of Filing or Requirement
Entity management delivers value over the long term when it is designed correctly, which means identifying the types of regulatory filings necessary to track.
The classification can be as broad as “Federal Government Report,” or as narrow as “HSR 102 Premerger Notification.” Tailor classification to your needs.
Step 2. Add Requirements by Entity
Add necessary requirements for each entity. A requirement item for an entity should include a short descriptive name, the relevant jurisdiction, and the due date. Many regulatory filings recur on a periodic basis. In those situations, the recurring period and frequency should be part of the record. Notifications are reset with each recurring period.
Government Permits and Licenses
Real estate intensive organizations often have a significant number of permits and licenses tied to an entity if for no other reason than separate entities own specific properties.
Zoning, construction permits, and land use exceptions all require filings and typically follow up activity. All of that regulatory history can be part of the corporate legal record with the help of entity management.
These tools allow general counsel to deliver and demonstrate value to the rest of the organization while fulfilling risk management duties.
The examples here are only meant to illustrate the range of possibilities for weaving entity management into the compliance function for general counsel.
Ownership and Org Charts
Objectives for Ownership Tracking and Org Charts
Generating an org chart is a key function of entity management. The majority of corporate org charts are created by hand with presentation software or more technical drawing applications. There are several problems with hand created org charts:
- They may be inaccurate the moment they are finalized. With one change to any ownership in the corporate family, the org chart is no longer accurate.
- They are not validated. The very phenomenon that makes an image attractive prevents anyone from verifying that the image reflects the underlying legal data about ownership.
- The focus is fixed. Org charts place an entity in focus to see all the parents and subsidiaries around that entity. If one company or person is the owner at the top of the chart, then that focus will reveal the entire org chart. However, when ownership at the top is diffuse, then the org chart looks different depending on which entity is in focus.
Legal org charts are also a rare opportunity for general counsel to communicate visually with business colleagues. They reveal gaps in the corporate registry. The visual density of org charts means that they communicate a lot of information quickly when done correctly.
To deliver the benefits of legal org charts without the drawbacks of hand created pictures requires starting with ownership relationships.
Manage Ownership Relationships
Entity management as a solution begins to sing when there are several entities. The first step to an org chart is to turn the equity relationships into data. The parent and subsidiary relationships will not materialize out of thin air.
The most reliable way to add ownership for entity management is to focus on one entity at time and then add that entity’s immediate parents and subsidiaries.
It is not necessary or even desirable to add parent and child several generations away. Attempting to add parents and subsidiaries several steps away leads to mistakes because it requires research and inferences. It is better to let entity management software automatically create the relationships several steps away.
Once a parent-subsidiary relationship exists in one direction it is visible when either entity is in focus.
Generate Org Charts
Org charts should be generated, not drawn. When entity management generates an org chart, the image is grounded in data, data about the equity relationships.
Org charts have vertical layers and horizontal spacing. Vertical layers communicate a hierarchy of ownership. Some entity management software will crawl the ownership data to generate the org chart both vertically and horizontally.
It is important that the org chart preserve the layers even when ownership skips a generation. In entity management, generation skipping is when an entity has a direct ownership interest in an entity several layers away.
Org charts center on an entity in focus and show the corporate family relevant to that entity.
Officers and Directors
Objectives for Officer and Director Management
Keeping up with officers and directors, especially with many entities under management, is a hassle and a legal risk. A functioning management structure, even if small, helps preserve the risk management benefits of the corporate veil.
However, people change roles, move to new offices, leave and join the company. Some organizations impose terms of service on board members. Legal entities might also have management and advisory boards.
Entity management software solves this problem with efficient tracking and reporting of officers and directors.
Multiple Roles and Multiple Entities
General counsel struggling to keep track of officers and directors are usually working with a pool of individuals from the ownership group and the management team. Individuals from those two groups serve on multiple boards and often in multiple roles. The CEO, for example, might be both an officer and a director.
It is easy for the individual serving on boards to lose track of what boards they are on. Entity management allows the general counsel to produce a report of all officer and director roles for any and all individuals in the corporate family.
With entity management it is also a trivial matter to assign officers and directors to new entities or to change the board make up because the relevant pool of candidates is already in the system.
Even when a new individual joins the company, add that person once and the officer or director is available for assignment to any other entity.
Terms of Service
Tracking terms of service for officers and directors is useful under two circumstances. First, the organizational documents or the enabling laws require finite terms of service for directors. Non-profit boards, for example, often impose defined terms of service on board members which might be subject to election or reappointment.
Second, even if there is no obligation to set term limits for officers or directors, recording each person’s start and end date allows general counsel to analyze who was on the board and who was on the management team during a period of time.
Entity management software allows an easy look back to determine who was involved for a decision or during a fiscal year.
Jurisdictions are at the core of legal entity management for general counsel. Most general counsel do not have the luxury of worrying only about one jurisdiction. They must consider the costs and consequences of legal relationships that span the globe and cross state boundaries.
Objectives for Jurisdictions
Business is both global and local. Multi-jurisdictional operations are no longer just the purview of large corporations. Entity management requires a comprehensive inventory of all the jurisdictions with which an entity has a legal relationship.
Tailored List of Jurisdictions
Based on a survey of 101 countries, the Organization for Economic and Cooperation Development (OECD) estimates that there are 522,000 subnational jurisdictions regulating at least some activity within their boundaries.
The general counsel’s list of jurisdictions does not need to exceed half a million. Instead, each organization needs to develop a tailored list of national and subnational jurisdictions. That list will certainly change, but just having a list opens powerful reporting and compliance management.
Crosses Entities, Documents, and Requirements
Jurisdictions cut across the main entity record, corporate documents and records, and requirements:
- The place of incorporation anchors the entity record,
- Filings and related documents pertain directly to a jurisdiction, and
- Compliance requirements and obligations pertain to the regulatory regime created by a national or subnational jurisdiction.
With a tailored list of jurisdictions, general counsel can easily associate the entity record, any document, and requirements with a specific jurisdiction. Reporting and analysis becomes a simple matter with a common list of jurisdictions.
General counsel can access all requirements by jurisdiction regardless of the entity record.
Objectives for Legal Entity Reporting
Reports are an important benefit of entity management software. They provide a consistent and valuable communication device outside the legal team. Often senior management does not have the time or the inclination to wade through a long legal memo about compliance requirements for a particular business unit.
Entity management software transforms those text requirements into data which is easier for management to consume and use. Reports empower general counsel to demonstrate their contribution to the broader organization.
There are many types of reports about legal entities. A report might be as simple as: “Show me all the entities incorporated in California.”
An entity report might be more complicated: “Show me all the entities with pass through tax status, which were incorporated in California prior to 2016.
Reports about documents are under appreciated because there is often a focus on the entity. However, looking at documents across the corporate registry can be illuminating.
General counsel might ask: “What D&O insurance policies are expiring in the next 9 months?” Entity management software opens up the possibility to answer this question in less than 2 minutes.
Annual Reports and Requirements
Compliance and filing requirements for the entire corporate family are accessible with reports. It is not necessary to open the file on each entity, make note of the filing requirements, and then move to the next entity.
Entity management software allows the general counsel to produce a list of all legal entity requirements in one place and tailored to a particular purpose.
Concurrent with the expansion of general counsel duties to include advisor and risk management for the board and senior management emerges a need for better collaboration within the legal team and between the legal team and the rest of the organization.
Collaboration takes many forms. It might be as simple as sharing details about a legal entity with a new executive. Legal counsel and corporate paralegals collaborate to complete a raft of filings on time. Outside legal counsel adds filings and documents for a new jurisdiction.
Regardless of the form of collaboration, there are two pillars which support safe collaboration for general counsel: technical security and access controls.
Data and documents stored in entity management software should be encrypted at rest and in transit. What does it mean to be encrypted “at rest” and “in transit”?
Encrypted at Rest
Encrypted at rest means that the data stored in a database or filesystem is stored as a hash and not in the clear so that if someone obtains a copy of the database or files, the contents would be a random sequence of letters, numbers, and symbols.
When data is encrypted it is exceedingly difficult to decrypt. Automated backups and redundant systems should also be encrypted.
Encryption in Transit
Encryption in transit means that the connection between the browser and the server is secure. When entity data is transmitted over Secure Socket Layer (SSL) it is encrypted in transit. The easiest way to confirm an SSL transmission is the first part of the URL (https://). The ’s’ in ‘https’ is the clue that the connection is encrypted.
When data is encrypted in transit, then anyone who intercepts the data will only see letters, numbers and symbols.
Access controls provide a way to limit the users who can access entity records. A flexible access control system allows general counsel to share legal entity data while still protecting sensitive information.
General counsel might, for example, grant access to outside counsel to view only the legal entities incorporated in one or two jurisdictions.
Notwithstanding common duties and objectives for general counsel, each organization has a different business strategy and sphere of operations. Entity management software needs to accommodate the particular needs of each organization.
Objectives of Customization
Customization of core entity management features must satisfy three criteria:
- Is customization included in the standard version at no additional cost?
- Is customization easy to implement without an IT project? 3, Is customization flexible enough?
Answering yes, yes, and yes, provides a cost effective yet powerful solution for general counsel.
Core Customization Requirements
There are several areas that need customization for every corporate family:
- Forms of organization (legal entity types),
- Document types and document categories,
- Jurisdictions, and
- Requirements and compliance obligations types.
Ease of customization is best managed by navigating to an administrative area in entity management software and then adding, editing, or deleting a form of organization, document type, jurisdiction, or requirement type.
There are two straightforward ways to make entity management software more flexible: tags and custom fields.
Tags are semi-structured data elements which allow general counsel to create a tailored list of additional data, such as tax status or business units.
Custom fields are the ability to add data collection elements when users create a new entity or modify an existing entity.
These two techniques make entity management software adaptable to any organization.
Entity management software can empower the general counsel and the entire legal team to deepen the relationship with the business while managing risk and improving compliance.