Reducing corporate business compliance risk in the US with good entity management
Opinion 3 minute read

Reducing corporate business compliance risk in the US with good entity management

01 July 2014

Compliance with corporate law doesn’t end with US federal securities laws; state business entity laws are equally important, carrying their own mandates and serious penalties for failure to comply. Our US expert explains.

Three key forces are converging to make state and local compliance more difficult than ever: increased government regulation, greater business risk, and more business-critical responsibilities for corporate secretaries and compliance managers.

In tight economic times, cash-strapped state and local governments have been increasing regulations, reporting requirements and enforcement for companies doing business in their jurisdictions. States are getting stricter about their Secretary of State annual report filings, and are increasingly expanding the mandates to include additional entity types.

Governments are raising the stakes for non-compliance, with increased fees and penalties for missed filings. Some states hold individual directors, officers, managers or agents personally liable for conducting business on behalf of a foreign corporation that failed to qualify. Penalties can be stiff, ranging from $500 to $5,000 on each officer, director and employee.

Local jurisdictions are also increasing enforcement of business license compliance. Nationwide, counties, cities and towns that previously did not collect license fees are proposing new fees to generate revenue and regulate entities. Some local governments are even engaging collection agencies to discover and recover fees from unlicensed businesses.

Business opportunity costs

When non-compliance with state business entity laws results in a loss of “good standing” status in the states in which the entities do business, a company also faces business risks. In many states, a foreign-qualified corporation not in good standing may not bring a lawsuit in that state until its good standing status has been reinstated. Entities not in good standing also risk losing the right to use their name in the state. Some states protect the names of administratively revoked or dissolved companies for a short period of time; others do not protect the names at all.

With the states putting compliance in the spotlight, many large businesses are pre-emptively demanding that their vendors and contractors provide proof of compliance as a condition of doing business. Lenders are also expanding the types of compliance documentation they require for financing agreements, adding proof of business license compliance to the already required good standing certificates and UCC filings.

The changing role of the corporate secretary

In response to the tighter regulatory environment and increased business risk, corporate secretaries’ responsibilities have expanded beyond the traditional role of institutional record keeper of corporate and compliance data. Corporate secretaries report that they are increasingly called into the early planning stages of new product or subsidiary launches to provide proactive counsel on the regulatory and compliance ramifications.

With this expanded role, corporate secretaries find they must increasingly delegate the task of updating entity data to subsidiaries and/or the tax, legal or accounting departments. However, this has added the new responsibility of managing the security of and access to this vital data to ensure its accuracy and integrity.

Entity management is essential to reduce risk

To avoid sanctions and lost opportunities, governance and compliance professionals must have a comprehensive view of where the company’s subsidiaries are doing business.

Instituting good entity management is proven to be the most effective way to reduce the risks associated with corporate business compliance failures. Best practices in entity management include taking a holistic view that integrates people, processes and systems.

Working with a third party partner can help to bring that compliance in line, and give the sort of oversight that will help ensure that good standing remains good indeed.

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