Entity health checks: Ensure your company stays compliant wherever you operate

By Lisa Wilcox, Market Head, North America, TMF Group

Running a multinational business is no easy task. Legal requirements and regulatory processes can differ vastly from one jurisdiction to the next, and they can change at any moment. This makes keeping on top of the management and administration of entities beyond a company’s home country can be a laborious and complex process. Carrying out regular entity health checks is a great way to keep your business compliant.

Operating a cross-border business is a huge challenge. Companies find themselves burdened with the responsibility of keeping track of legislative and regulatory developments across multiple jurisdictions. Local rules and regulations can often change, leading to oversights or misunderstandings that can see businesses become non-compliant – and on the receiving end of penalties or subject to reputational damage.

For example, during the process of an acquisition, information of former directors, or addresses held on file might not get updated with the relevant authorities, leaving you on the wrong side of being a compliant business.

Sometimes entities are set up in haste to meet deadlines and skeleton legal teams are scrambled together, meaning that resources are thinly spread, and necessary actions can get overlooked. This can lead to management not being fully aware of the local and international obligations that are involved, and how and when they should be maintained and updated.

Non-compliance: consequences and considerations

The consequences for a company that slips out of compliance can be punishing. Organisations can be faced with financial penalties, or even lose the privilege of doing business in a specific jurisdiction. Sometimes, in more severe situations, company directors can be held personally liable and, depending on the jurisdiction, could even face imprisonment.

It’s also worth considering how the Covid-19 pandemic has impacted the incorporation and growth of businesses across jurisdictions, and why the pandemic has highlighted that the need for frequent entity health checks is more important than ever.

In TMF Group’s latest Global Business Complexity Index report (GBCI 2022), we take a deeper look at the many challenges companies face when setting up a legal entity and then operating within, and withdrawing from, a foreign jurisdiction.

During the pandemic, many jurisdictions were forced to rapidly adapt and streamline their operating processes by embracing digitalisation. This is typically a positive step towards reducing business friction, however, the hasty introduction of digital processes to replace traditional, in-person interactions has, in some cases, actually introduced some short-term complexity.

At the beginning of the pandemic, we witnessed an initial freeze on business expansion and the establishment of new entities slowed down drastically. Coming out of the pandemic, as the business world started to reopen, companies which were ready to kickstart their expansion plans found that the process of incorporating a new business took a lot longer than before.

There were also disruptions on the impact or interest in new entity arrangements, as many businesses wanted to see how the business world settled before making any concrete plans.

With the switch for many companies to a new digitalised business, and plans to incorporate and expand businesses into new jurisdictions, it’s critical that entity health checks be carried out to ensure that all documentation is kept up to date, and to ascertain if any new rules or regulations have been introduced in that particular jurisdiction.

With this in mind, multinational businesses companies would benefit by dedicating resources to periodically reviewing their overseas structures and processes and ensure that all businesses are fully compliant in the jurisdictions in which they operate.

But what does this entail exactly, and where should you begin?

How to plan your next entity health check… and what to consider Planning is the key to success for ensuring that an entity remains compliant. Carrying out frequent entity health checks is not only good practice, but highly advised to keep all legal bases covered. This is particularly important when acquiring an entity in an M&A transaction, or when making the transition from a decentralised to a centralised governance model. Simple measures such as introducing a compliance calendar for each jurisdiction and entity type can help a business stay on top of filing deadlines, etc.

It’s also wise to hire a local resource to help keep up with the latest local rules and regulations. Not only will they speak the local language within the jurisdiction, but they will also be familiar with the local business culture, and will, therefore, be well positioned to keep abreast of any changes that will occur from a legal and administrative perspective.

An entity health check should cover some of the entity basics, such as:

  • company 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 (and shareholder meetings)
  • financial statements (filings, year-end, reporting, deadlines, last date filed)
  • board meetings directors and officers any powers of attorney
  • Can you carry out an entity health check alone…
  • or should you call in a professional?

Providing you have the time and resources available to you, it’s possible to carry out an entity health check by yourself. However, you would need to be confident that you understand the requirements in each jurisdiction where you operate your business.

This would entail knowing where and how to get confirmation from local authorities that your business is fully compliant, and if there are any updated rules or regulations that need your immediate attention. In some jurisdictions you will need to visit government offices in person and request specific files to complete required documents. The clear downside is that this can be a rather time-consuming process.

Once your business operates in five or more jurisdictions, the requirements to carry out entity health checks becomes much harder. Especially with being able to keep up with any local business rule changes that come into effect.

This is when an experienced and local service provider with extensive knowledge of the jurisdiction and its business rules can be a major benefit. The local service provider will need to know of the most up-to-date rules and regulations for doing business in the jurisdiction, and they will need to know exactly what is required to remediate any compliance issues, and quickly.

Outsourcing entity health checks can also be a relatively low-cost option to keep your business compliant and out hot water.

Help is at hand

If you’re unsure how to get started, TMF Group can help your business with frequent entity health checks and keep your business compliant all year round.

We’re 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.

We also provide 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.

Make an enquiry today if you need more information or support with your entity health checks.

Written by
Lisa Wilcox
Market Leader, North America

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