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March 3, 2023

What is Legal Entity Management?

Discover the foundations of legal entity management, entity management identifiers, requirements, and the benefits of LEM software.

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As businesses scale and adapt, companies must keep track of an ever-growing number of legal entities. These entities become increasingly complex and include subsidiaries, partnerships, trusts, and joint ventures, each with its own legal and regulatory requirements.

During this evolution, to ensure compliance and effectively manage risk, in-house legal teams are responsible for defining the framework in which their company can operate within the bounds of legal and regulatory requirements. This framework is what we call “legal entity management”; without which companies risk non-compliance, financial penalties, damage to reputation, and operational inefficiencies.

With this in mind, to effectively protect and propel your company, it’s important to understand the wider legal entity management landscape, its role in effective business governance, legal entity requirements, and the benefits of adopting legal entity management software vs more traditional solutions.

In an effort to support the 89% of companies that report facing challenges in managing their legal entities, let’s delve into the details to help you better understand the topic and how it can benefit your in-house legal team in managing legal entities effectively and efficiently.

In this article, we will cover the following:

Legal entity management is the process of managing all the legal entities that make up a company. These entities can include subsidiaries, partnerships, trusts, and joint ventures. This task becomes increasingly complex as your entity landscape expands, and each has its own legal and regulatory requirements.

Legal entity management is the process of organizing, tracking, and managing all the legal entities that make up a company to ensure compliance, mitigate risk, and achieve strategic objectives.

The ultimate goal of legal entity management is to ensure that the business operates effectively, complies with all legal requirements, and achieves its strategic objectives.

Legal entity management plays a critical role in ensuring effective business governance. Effective entity management enables companies to manage their legal and regulatory obligations, including compliance, risk management, and financial reporting. When done well, it also ensures that legal entities operate effectively and that the company meets its strategic objectives.

One crucial aspect of legal entity management is the use of legal entity management identifiers. Legal entity management identifiers are unique codes or numbers assigned to each legal entity within a company which allows for easy identification and management of these entities.

Entity management identifiers are used to track and manage legal entities and are an essential component of entity management. Examples of entity management identifiers include the legal entity identifier (LEI) and the global entity identifier (GEI).

According to a study by EY, 68% of companies report the lack of access to accurate, up-to-date information on legal entities as a major challenge.

The use of legal entity management identifiers can improve compliance, mitigate risk, and improve corporate governance. In addition, legal entity management identifiers facilitate due diligence activities, which can improve merger and acquisition outcomes.

Legal entity management is a critical function for in-house legal teams, but who is responsible for managing legal entities? The answer is not always straightforward and can depend on various factors, such as the size and complexity of the organization, the jurisdiction, and the type of legal entity.

68% of companies report only having 1 to 3 employees involved with legal entity management processes.

Below, we explore the different roles that may be responsible for legal entity management and how they might be involved.

Corporate secretaries

Corporate secretaries are typically responsible for managing legal entities’ day-to-day operations, ensuring compliance with legal and regulatory requirements, and maintaining accurate records. They play a crucial role in corporate governance by providing support to the board of directors, coordinating shareholder meetings, and ensuring the company’s policies and procedures are followed.

The legal ops function is responsible for optimizing the legal department’s processes and systems to enhance efficiency, reduce costs, and improve outcomes. They often oversee legal entity management to ensure compliance with legal and regulatory requirements, improve the accuracy of legal entity data, and mitigate risk.

Paralegals

If available, paralegals can play an impactful role in legal entity management by providing support to in-house legal teams in managing legal entities’ day-to-day operations. They typically assist with maintaining legal entity records, drafting legal documents, and managing compliance with legal and regulatory requirements.

Board of directors

The board of directors plays an important role in legal entity management by providing oversight and direction to the organization’s legal entities. The board ensures that legal entities align with the company’s strategic goals and objectives and comply with legal and regulatory requirements. They also approve significant transactions involving legal entities and monitor legal entity performance.

Management/senior leadership

Working in conjunction with the board of directors, the management team is responsible for overseeing legal entity operations and ensuring they align with the company’s strategic objectives. They also work with corporate secretaries, legal ops professionals, and other stakeholders to manage legal entities’ day-to-day activities, including compliance with legal and regulatory requirements, risk management, and improving performance.

Shareholders

By nature, shareholders have a vested interest in legal entity management as they own a portion of the company. They can influence legal entity decisions by voting on proposals and electing board members who oversee legal entity operations.

Legal entities have various legal and regulatory requirements that must be met to ensure compliance and mitigate risk. Compliance with these requirements is critical to ensure that the company operates effectively, complies with legal and regulatory requirements, and manages risk. There are three core requirements when it comes to legal entity management.

1. Risk mitigation

Legal entity management helps organizations mitigate risk by ensuring compliance with legal and regulatory requirements, managing litigation risks, and protecting intellectual property rights. If you fail to manage risk through legal entity best practices, you risk financial, operational, and brand damage challenges.

2. Compliance

Legal entity management is crucial for ensuring compliance with legal and regulatory requirements, including tax laws, data privacy regulations, and labour laws. Non-compliance can lead to financial penalties, legal liability, and damage to reputation. Effective legal entity management helps organizations maintain compliance and avoid legal and regulatory issues.

3. Achievement of strategic objectives

Legal entity management plays a crucial role in working towards business goals and achieving strategic objectives. Organizations can use legal entities to structure their operations, expand into new markets, and raise capital. Effective legal entity management ensures legal entities align with the organization’s strategic goals and objectives.

To ensure effective legal entity management, companies should consider the following best practices as a starting point:

  1. Centralization – centralize legal entity management to ensure consistency and accuracy across the organization
  2. Automation – automate legal entity management processes to improve efficiency and reduce errors
  3. Standardization – standardize legal entity management processes and procedures to improve consistency and accuracy
  4. Integration – integrate legal entity management with other business processes and systems to improve efficiency and data accuracy
  5. Regular review – regularly review legal entity data to ensure accuracy and relevance

Excel has long been the go-to tool for in-house legal professionals for many purposes, one of which has been entity management. However, as organizations become more complex and regulations more stringent, using Excel for legal entity management is no longer sufficient.

Excel is a versatile tool that can be used for many different tasks, but it is not designed for legal entity management. There are several limitations of Excel that will hold you back if you attempt to use it for legal entity management in this day and age.

Heavily manual

87% of General Counsel report their department spends too much time on repetitive tasks such as legal entity compliance.

While you can write formulae, Excel is still a very manual and time-consuming way to complete the sometimes high-volume but low-value entity management tasks.

Limited data validation

Excel lacks the ability to validate data and ensure accuracy. Without data validation, errors can go unnoticed, leading to compliance issues and operational inefficiencies.

Limited collaboration

Excel is not designed for collaboration, making it difficult for multiple stakeholders to work on legal entity data simultaneously or keep track of version control.

Limited scalability

Excel is not designed to handle large amounts of data, making it difficult for organizations with many and a growing number of legal entities.

Limited reporting

Excel lacks the ability to generate sophisticated reports, making it difficult for legal teams to provide insights into legal entity management.

Lack of data security

As it is not a build-for-purpose platform, Excel does not have the capabilities to meet modern-day data security needs.

As companies scale, Excel becomes increasingly inadequate so businesses must consider more robust solutions for legal entity management.

Outsourcing legal entity management can provide many benefits to companies, including access to expert professionals, reduced costs, increased efficiency, and improved compliance. Outsourcing entity management enables companies to focus on their core competencies and strategic objectives while ensuring that their legal entities are managed effectively and efficiently.

Over 70% of companies expect their legal entity management staffing levels to decrease or remain the same in the next 12 months.

Adopting a legal entity management software like Newton provides companies with a comprehensive solution for managing legal entities in a more automated manner. In turn, this allows in-house legal teams to manage their legal entities more effectively while requiring less time.

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Summary

Legal entity management is a critical function for in-house legal teams. Effective legal entity management can mitigate risk, ensure compliance, and achieve strategic objectives. Legal departments should prioritize implementing best practices for legal entity management including centralizing the matter, automating and standardizing processes, and regularly reviewing legal entity data.

By adopting best practices and, importantly, capitalizing on modern software such as Newton, companies can ensure effective legal entity management, leading to improved outcomes and reduced risk.

Newton delivers an easy and intuitive platform to manage and automate your legal entities’ information, governance, and compliance. If your entity management processes are currently creating friction for your team (which they are for many), be sure to get in touch to explore how Newton can help you have everything you need to be in control of your entity portfolio.

About this article

Sources

EY (2021). The General Counsel Imperative: How can you evolve entity management into effective governance?
ACC (2022). Legal Entity Management Practices.

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Published by admin in Wiki
Tags:
Best Practices, 
Corporate Governance, 
Legal Entity Identifiers, 
Legal Entity Management, 
Requirements, 
Stakeholders, 

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