In the early startup stages, it is easy to get drawn away from corporate housekeeping as entrepreneurs have so many things to attend to. When an organization has only a few legal entities in its structure, some may consider employing entity management software as overthinking. Yet, in reality, it is quite the opposite.
Having a user-friendly and effective entity management system is foundational for collaboration across teams, strong governance and compliance and developing investors' trust. Keep reading to find out more about the consequences of poorly maintained legal entities and why entity management should be on your company priority list from day one.
Consequences of Subpar Entity Management Practices
While it is common knowledge that startups can grow exponentially, there is still a lack of understanding about how ineffective entity management practices and the absence of strong compliance management can hinder growth and investments.
If a business fails to adopt effective entity management practices, the issues tend to snowball as the organization grows by adding new legal entities and structures. Running entity management on spreadsheets, exchanging information by email and relying on paper documents and physical signatures create silos and bottlenecks and lead to duplicate work, human error and inefficiencies. At the same time, incomplete or outdated shareholder data and non-compliant director appointments can result in late filings and non-compliance.
Today, the regulators like FinCEN are implementing policies to motivate companies to integrate compliance procedures into their practices at early stages. They do it by setting very short reporting deadlines and imposing heavy penalties for violating compliance obligations. In addition, non-compliance with regulatory requirements may cause reputational damage and raise red flags for investors.
When businesses go into funding rounds, most often, they have to engage external lawyers. External counsel is essential for startups, but they can be a big investment. Meanwhile, when startup legal entities are poorly maintained and corporate records are disorganized, obsolete or missing, it can greatly increase the time to do the legal paperwork and inflates the legal fees.
Why Should Entity Management Be on Your Priority List from Day One?
Instead of relying on ineffective manual processes, businesses would be much better off by adopting top-tier entity management practices at early stages. Having smart entity management software running in the background would save startup entrepreneurs much time and resources both during the funding rounds and when the company grows and adds new entities. By having a single source of truth for all company records and governance documents, startups can streamline compliance work and keep external legal fees to a minimum.
When organizations adopt robust entity management practices, they have all their shareholder data in one place, available at the click of a button. It facilitates compliance with applicable regulations on reporting beneficial owners and speeds up due diligence.
After businesses develop a central repository for all their corporate records, they can share permissions to access certain data by external counsel and auditors, keeping other information hidden. It saves considerable time for emailing back and forth with lawyers and helps to avoid sending confidential information by email.
Entity Management for KYC
KYC is another area where startups can benefit from adopting an entity management system. Businesses need to verify and identify the person they interact with to prevent fraud or identity theft from other users. While KYC is a legal requirement for businesses belonging to the Fintech and financial sector, startups from other industries, like travel, mobility or education, also need to have their KYC processes to protect both themselves and their users.
Modern business software enables to create and strengthen comprehensive KYC and AML processes within the system. By implementing entity management software, startups can ensure the ethical conduct of clients and verify and manage clients' data with confidence.
What Are the Requirements for Business Software?
In today's remote environment, adopting top-tier entity management practices calls for a full application of digital technology. When working in an environment of constant change, startups need the most effective digital tools providing for remote access, data integrity, maximum customization and effective presentation capabilities. Given the extensive amounts of data required for funding rounds and day-to-day operations, startups need best-of-breed legal technology to ensure compliance and streamline legal work.
In most cases, organizations don't have massive legal departments to address entity management. They neither have the time nor the resources to go through extensive training sessions and struggle with one-size-fits-all outdated software solutions. Startup business software needs to be user-friendly and intuitive to support the legal function and offer tangible value during funding rounds.
Meanwhile, businesses can no longer rely on the intuitiveness of Excel spreadsheets, the cloud capabilities of Google Docs or sending documents by email. Useful as they might be, in an entity management context, these tools tend to multiply human error, lead to disorganized, nonintegrated and incompatible data and create inefficiencies when the organization grows and adds new entities and structures.
Last but not least, businesses need strong org charting capabilities to represent the organization to investors. A modern entity management software like Athennian provides startups with a powerful org charting module which allows creating organizational charts just in a few clicks. Athennian-generated org charts provide the most important information, such as tax structure, jurisdiction, percent of ownership and other details, as well as ownership connections and historical relationships among entities in a convenient visual format allowing for the most effective presentations.
Learn More About Business Software with Athennian
No matter if you have an established business or are in the startup phase, you need well-maintained and compliant legal entities to develop your organization and attract investments. An effective entity management software can do that and more by creating a single source of truth for your corporate records, streamlining shareholders' data, providing for KYC processes and enabling secure data-sharing capabilities. For more information about how entity management software can benefit organizations during funding rounds and streamline your compliance work, please don't hesitate to contact the Athennian team to book a customized demo with our experts.
For more information about the benefits of working with modern entity management software, please don't hesitate to contact the Athennian team to request a custom demo with our experts.