Entity health checks: the doctor will see you now
Article 5 minute read

Entity health checks: the doctor will see you now

22 June 2021

Operating a multinational organisation, or being at the helm of an expanding business, is not an easy task. This is especially true when it comes to the management and administration of entities beyond a company’s home country. Legal structures and regulatory processes differ greatly from one jurisdiction to another, which can make it almost impossible to keep track. Entity health checks can serve as a solution to the ongoing ‘firefighting’ and help companies to take control of the situation.

Cross-border businesses often find themselves lost in a maze of local company law and regulations governing the management and control of their legal entities. On top of this, entities are often set up in haste because a deadline needs to be met, sometimes without checking local laws, or really knowing the specific local requirements that the entity needs to comply with. All too often, the setup, management and maintenance of an entity, and compliance with local and international regulation, is handled by a skeleton legal team who already have a multitude of other responsibilities.

With this in mind, international companies would be best served to dedicate resources, or enlist help, when periodically reviewing their overseas structures and processes to make sure they are fully compliant. But what does this entail, and where should you begin?

The basics

An entity health check should cover some of the entity basics, such as its name, registration number, date of incorporation, trading status, registered address and main business address. Additionally, it should extend to information regarding shares (types, numbers, values, capital), shareholders, financial statements (filings, year-end reporting, deadlines, last date filed), board meetings, directors and officers, and any powers of attorney.

A company can conduct an external check with local authorities such as the local chamber of commerce, depending on the jurisdiction, to see if all documents are filed and directors, board meetings, addresses and so forth, are all current. Internally, the company can check with the relevant stakeholders in tax, legal and finance, to see if all necessary actions have been completed.

An ongoing process

A multinational should perform a health check on their overseas entities from time to time, to assess if they are still in compliance with local rules and regulations and to see if all requirements are met, such as local filings with a chamber of commerce, board meetings being held and minutes made, or local directors appointed, if required.

It can occur that an entity falls out of compliance when these entities are, or were, part of an acquisition; information on former directors or addresses may not get updated with the relevant authorities in the heat of the transaction, or are planned to be changed later but are subsequently forgotten. It can also arise that non-legal compliance employees are charged with oversight of local compliance, perhaps due to lack of internal coverage in a low headcount jurisdiction, and they may not be aware of all local obligations.

Most often though it is as simple as local rules and regulations changing and the responsible parties at the headquarters not being aware, as they are burdened with keeping track of developments across multiple jurisdictions. When a company falls out of compliance, the consequences can be punishing; besides reputational damage, organisations can face financial penalties, lose the right to do business in a jurisdiction, or company directors can be held personally liable and even face imprisonment, depending on the jurisdiction.

Best practice

Planning is the key to success for keeping an entity in good standing and remaining compliant. Conducting a health check is certainly best practice, particularly when acquiring an entity in an M&A transaction, or transitioning from a decentralised to a centralised governance model. You want to make sure you have got all bases covered; having a compliance calendar for each jurisdiction and entity type, will help you keep your eye on the ball where filing deadlines are concerned.

Having a local resource to keep up with changing rules and regulations is also a prudent move. Not only will they speak the local language, they will also know the local business culture, and have their finger on the pulse of what’s on the horizon from a legal and administrative perspective.

Do it yourself, or engage a service provider? The pros and cons

You can definitely perform a health check on your own, provided you have enough time and resources available to do so. You need to know what the requirements are in a certain jurisdiction and where to go to get confirmation from local authorities, to determine whether you are fully compliant or not. Because every business environment has its own nuances, this can be time consuming and tricky to navigate. In certain jurisdictions, you need to visit government offices in person to request certain files or gather information, for example.

Once you operate in five or more jurisdictions, it becomes a lot harder to keep up with local rule changes. Using an experienced service provider that has extensive local knowledge is a convenient and relatively low-cost option to find out if your entity is in good standing or not. If it’s not in good standing, the service provider will know what needs to be done to remediate any compliance issues and can help you to solve them swiftly.

Talk to us

TMF Group is a global leader in Global Entity Management and related services. We have a presence in 85 countries, with 9,100 experts spread around the globe. Wherever you operate, our professionals speak the local language, have the local knowledge, know the local business culture and can help you to navigate any compliance matters.

TMF Group also provides a full suite of accounting and tax, and HR and payroll services, to help keep your entity in good standing throughout its lifecycle - from incorporation to dissolution. This makes TMF Group the ideal one-stop-shop for any organisation operating and growing internationally.

Need support or more information? Make an enquiry today.

Written by

Xander Benjamins

Solutions Architect Global Entity Management

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