In some studies, legal entities are compared to building blocks that allow for framing an organization into an optimal structure. However, when using legal entities as building blocks, businesses sometimes overlook the essential characteristics and functions of their entities, which leads to omissions and ineffective practices in creating and managing new business units. Below we go to the basics and check in more detail what a corporate entity is, what it entails and what are the most effective practices for managing legal entities in your organization.
What Is a Legal Entity?
Simply put, a legal entity is a business unit possessing legal rights and responsibilities which are separate from its owners. Thus, a legal entity has the right to enter into agreements, purchase and own property, open a bank account, file a lawsuit and be sued, hire and fire employees and so on. A legal entity must also comply with existing regulations, including registration requirements, licensing requirements, tax filing, regulatory compliance and other applicable rules.
Many organizations have more than one legal entity under the same roof. Companies create multiple legal entities for many reasons, such as limiting risk exposure, spreading liabilities among several entities, tax optimization, or regulatory considerations. As companies grow in size, they create more and more legal entities, which call for effective entity management software and practices to stay efficient and ensure collaboration across the board.
What Is a Corporate Entity?
In many cases, the terms corporate entity and legal entity are used interchangeably. In such contexts, corporate entity means any business organization, whether incorporated or unincorporated, including partnerships, LLCs, as well as corporations and other organizations.
However, in many situations, a corporate entity can mean an incorporated legal entity classified as a corporation for tax purposes. In these cases, the term 'corporate entity' is used in a narrower sense to refer to corporations only, while the term 'legal entity' encompasses all types of businesses, including sole proprietorships, partnerships, LLCs and corporations.
Types of Legal Entities
Companies can use various types of legal entities, each serving its own purpose. It is not uncommon for companies to create multiple legal entities of various types in different jurisdictions for holding property or tax considerations while keeping the same ownership.
Most often, businesses choose among the following types of legal entities:
• sole proprietorship where there is no distinction between a business and the owner, which is preferred primarily by smaller operations,
• partnership, which is similar to sole proprietorship with the only difference that a partnership has two or more owners,
• LLC or limited liability company formed by members who own an equity interest in the assets after making an investment, which can be taxed differently from corporations,
• corporations typically operating under bylaws and run by a board of directors where shareholders own shares in the business.
What Does Legal Entity Management Entail?
Legal entity management is a business function required for any business operation having one or more legal entities. The goal of entity management is to ensure governance and compliance to steer an organization toward its goals through following internal strategies, ensuring accountability and complying with the requirements of external regulators.
To achieve these goals, legal entity management should provide for:
• central storage of company data for each legal entity, including information about registration, officers, directors and shareholders,
• timely filing and reporting to ensure regulatory compliance,
• access to corporate entity records for each department, shareholders, directors and third parties,
• risk management by creating and managing separate entities as the company grows,
• support for contracts, mergers and acquisitions and other transactions.
Why Investing in an Entity Management Software is a Best Practice?
Many smaller organizations and early-stage startups are tempted to do their entity management manually, keeping physical minute books and relying on the intuitiveness of Excel spreadsheets. However, in the long run, this approach causes inefficiencies, leads to manual errors, decreases the quality of corporate records and makes it impossible to effectively scale up and collaborate.
Instead, organizations would be much better off by having modern entity management software from day one, creating a single source of truth about the business, allowing to add as many new legal entities as needed at several clicks. Such a strategy would save businesses many hours of correcting manual errors and reconciling data scattered in spreadsheets and various platforms while struggling with huge volumes of disorganized information.
Prepare for M&A or Investment Rounds
When a company starts looking for investments or goes into a merger and acquisition deal, the legal and the auditing team live through their most challenging moments. In addition to running due diligence on the merger, lawyers have to file for regulatory approvals, investigate compliance and license requirements and prepare the necessary documentation. Corporate paralegals and in-house legal teams would greatly benefit from the ability to access all corporate records centrally stored on secure cloud storage run on an effective entity management platform.
Scale Up Effectively
Entity management software speeds up companies' growth by cutting the time to create new legal entities from hours and days to minutes and eliminating manual processes, adding virtual minute book, eSignature functionality and auto-populated templates.
Improve Organization Efficiency
By having all corporate records stored on central cloud storage, organizations can ensure effective collaboration across departments and improve sharing of data for contracts and transactions.
Ensure Secure Data Access and Storage
Modern entity management software meets another important challenge faced by organizations in today's digital world related to the safety and security of their corporate records. By keeping all their data on encrypted cloud-based platforms like Athennian, businesses ensure compliance with applicable security standards and have peace of mind knowing that all their information is safeguarded against attacks or unauthorized use.
Learn More About Legal Entity Management with Athennian
The proliferation of legal entities over the last years necessitates the application of effective entity management software by all types of businesses, from early-stage startups to multinational corporations. For more information on how entity management software can streamline your governance, risk and compliance and ensure effective growth, please don't hesitate to request a customized demo with an Athennian business entity management expert today.