Managing entities across multiple jurisdictions requires a sophisticated strategy
Most companies are still finding it tough going in this slow economy. Imagine how management and the board would respond to losing business, or being excluded from new business, because of easily avoidable compliance failures. It may seem unlikely, but the examples below suggest otherwise.
Example 1: A property management company was seeking refinancing for its entire portfolio. The lender required proof that each property – formed as a separate entity – was in full compliance with its Secretary of State, Uniform Commercial Code (UCC) and business license filings. In the absence of full documentation, the corporate secretary had to sign an affidavit in order for the company to move forward with its business plan.
Example 2: A construction firm did not establish oversight to ensure all its licenses and permits were up to date. An installation went bad, and it was subsequently discovered that the firm had used an unlicensed subcontractor. The firm had to pay its customer $1 million because it could not defend this unlicensed work.
Example 3: Another construction contractor won a bid for a large project in Louisiana. A competitor was able to successfully challenge the bid because the first company was not licensed to do business in the state of Louisiana. The Louisiana government stripped the firm of the bid, and it was not allowed to reapply.
These companies shared two entity management vulnerabilities. Their entity and compliance data were ‘siloed’ within subsidiaries and multiple departments, and they relied on common office spreadsheet and calendar applications to manage their entity data. Many firms remain unaware of the dangers of these and other inadequate entity management practices. Using piecemeal legacy tools inevitably yields inaccurate, outdated data that are not coordinated with the requisite rules and deadlines. This renders the vital corporate record virtually useless for reporting and compliance purposes.
Mistakes and non-compliance
When companies rely on common office applications for entity management, they face multiple risks:
- Personnel who are not appointed officers may execute documents they are not authorized to approve.
- The company can miss filings or make unnecessary filings because information on their entities, states of registration, individual jurisdictional compliance requirements and filing deadlines is not integrated.
- Inaccurate filings can be made if staff members responsible for compliance are scattered in multiple offices or do not have first-hand access to complete entity information.
- Organizations can lose valuable staff time to redundant, manual data entry in order to keep data up to date in separate applications.
In a world of increasing reporting requirements, regulation and enforcement, improperly managed corporate compliance can have costly ramifications. At the state level, attention has turned to enforcement of annual report filings with the Secretary of State. Jurisdictions are constantly amending their requirements, often expanding the scope of requirements to include additional entity types.
Cash-strapped state and local governments are raising the stakes for non-compliance, with increased fees and penalties associated with corporate filings. Some states hold individual directors, officers, managers or agents personally liable for conducting business on behalf of foreign corporations that fail to qualify. Penalties can be stiff, ranging from $500 to $5,000 for each officer, director and employee.
Local jurisdictions are also increasing enforcement of business license compliance. 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.
Business opportunity costs
Entities can also lose business opportunities if their missed filings result in a loss of good standing in the states in which they do business. In many states, a foreign-qualified corporation not in good standing may not bring a lawsuit in that state until its good standing has been reinstated. Without access to the courts, a company cannot bring suit to enforce its contracts.
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. A firm can spend thousands of dollars to get itself back into good standing.
To strengthen compliance programs, many large companies are demanding proof of compliance from their vendors and contractors as a condition of doing business. As noted above, lenders are also expanding the types of proof of compliance they require for financing agreements, adding proof of business license compliance to the already required good standing certificates and UCC filings.
Coordination and collaboration reduce risks
Corporate secretaries should have a holistic view of where the company’s subsidiaries are doing business. Using a centralized, web-based corporate records repository is one way of doing this. When data are entered only once or are automatically prepopulated, the company saves time and reduces data entry errors. A customizable calendar tool can automatically track statutory and regulatory filing dates and events related to contracts, agreements and trademark expirations, and can generate email alerts to responsible parties.
In a more aggressive enforcement climate, proactive entity management controls have become a must-have business function. Managers may not realize the scope of the risk they are undertaking in using piecemeal office applications, or may be resigned to penalties and duplicated effort as unavoidable costs of doing business. But, like a boat with many hidden leaks, they are taking on water faster than they know. Their unprepared corporate secretaries may be one unexpected failure away from sinking their careers. Corporate secretaries can eliminate these dangers with an online system that integrates entity data with compliance tools in a single platform.
