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Perspectives
Legal entity management and corporate growth
Advance your future by managing complexities and risk
Next-gen businesses grow in different ways. Some types of growth are organic and tend to be ongoing, while others—notably, merger and acquisition (M&A) activity—can be inorganic and intermittent, infrequent, or even rare. Either way, continuous legal entity management (LEM) and corporate growth go hand-in-hand. LEM is a both a critical component of corporate growth strategies and an effective means of mitigating risk.
Organic business growth and LEM
Organic business growth can take many forms, such as geographic expansion, both within a country’s borders as well as internationally; the introduction of new products or services that are outgrowths of those already in existence; and diversification into related industries. As you define your future, it is critical to recognize the connection between entity management and corporate growth strategies in both the oversight of existing legal entities and the formation and maintenance of new entities. In some cases, existing legal entities may be adequate to support and facilitate growth; in others, it may be desirable to form new entities.
Once a decision is made to form one or more new entities, additional considerations arise, such as selecting the name, directors, and officers of each entity, the jurisdiction in which it is organized, and the type of entity to be created, as well as obtaining and maintaining necessary business licenses, such as licenses required to take on employees, and developing and implementing processes to maintain each entity’s compliance and good standing. These considerations suggest that legal, compliance, and other support teams need to be involved at an early stage so that each new entity is able to “stand up” in a timely manner.
Similar factors need to be considered and addressed where geographic expansion is undertaken, but new geographies may require additional attention—particularly when expansion involves entering a new country or global region. In those cases, different laws or entire legal systems may apply, and different business and/or general cultures may lead to different outcomes. To navigate the complexities in the local regulatory environments in which an organization operates in, inclusive of jurisdictional compliance, organizations are often turning to global service providers.
Inorganic business growth and LEM
Many of the challenges outlined above apply to M&A and other forms of inorganic growth. However, when a company is contemplating an acquisition—even a relatively small one—additional questions related to their legal entity management may emerge. Moreover, in situations where a company does not routinely engage in acquisition activity, the transaction itself can be extremely disruptive, thus complicating the mix of facts.
Some additional questions that may arise in the context of M&A deals include:
- How many new entities are we acquiring? Do we have the staff and other resources to maintain these entities? Do we need to form additional entities to facilitate the transaction and, if so, do we need to maintain them indefinitely? Do we have processes in place to eliminate redundant entities once the transaction closes? Do we have effective legal entity management processes and technology that can be relied upon post transition?
- Do our due diligence processes provide assurance that each of the entities we are acquiring is in good standing, has all necessary state registrations and business licenses? Do we have adequate resources to meet issues that may come to our attention as a result of the due diligence process?
- How do we navigate the situation where the company being acquired has legal entities in geographies where we’ve never operated?
Notably, some of the same considerations apply when a company is engaged in a disposition.
Seeking a surer path
The questions and challenges outlined above seem—and probably are—daunting. To advance their future, companies can take actions to move forward with purpose and preparedness and mitigate the challenges of entity management and corporate growth.
Redefining entity management and corporate growth
The above is a mere summary of some of the challenges that can result from a failure to pay sufficient attention to LEM in time of growth. Moreover, LEM is not a “one and done” activity that kicks in when growth plans are first launched and then recedes over time. Rather, it requires ongoing if not constant oversight, as legal, compliance, tax, and other requirements—as well as the organization itself—constantly evolve.
A failure to address LEM can be costly in many ways, and can even limit growth, whether organic business growth or inorganic growth. Companies should consider taking stock of their LEM activities and act, accordingly, using internal resources, the engagement of third-party service providers, or a combination of the two.
This article contains general information only and Deloitte is not, by means of this article, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This article is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this article.
Learn more about Deloitte's Legal Entity Management Services
An outdated and inefficient legal entity management process may create needless costs and risks, including potential instances of noncompliance. Deloitte's Legal Entity Management* (LEM) services can provide increased transparency into legal entity governance and reduce cost, all in an effort to make your legal ecosystem more efficient and effective. We are powered by an integrated workflow, data, and document man.:igement technology platform providing high visibility into engagement management workflows and real-time analytics.
*The Deloitte US firms do not practice law or provide legal advice.
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