30 November 2018
As a company begins to form and grow, it is essential that owners and decision-makers be aware of their legal, regulatory and compliance obligations, and the degree to which their choice of business structure may impact these responsibilities. To that end, below we’ve created a brief summary of each business structure and how that choice may affect its entity management strategy.
Entity Management Basics
At its core, entity management refers to the recurring tasks that a business owner needs to do in order to remain compliant with various government authorities. Regardless of business structure, all companies must perform some level of entity management. Common tasks include such activities as filing state and federal taxes, renewing any applicable registration for the entity and keeping the entity’s DBA filing current. As we’ll see, the more complex the business structure, the heaver the regulatory burden and the greater the need for powerful entity management strategies.
The Sole Proprietor and General Partnerships
For a sole proprietor, the idea of entity management may seem like the furthest thing from his mind. Sole proprietorships are not required to file formation papers, nor must they form a board of directors. All business decisions are in the hands of the owner alone, so there is no need to formulate official annual reports. Likewise, the formation of a general partnership is also relatively simple and, aside from an optional partner agreement, does not require any official formation paperwork.
All that said, both the sole proprietor and general partnerships are required to claim profits and losses from the business on their individual tax returns. So, while some of the more complicated reporting procedures may not apply, these company types should still keep a careful tab on all expenses, fees, profits and transactions so as to accurately file with the Internal Revenue Service (IRS). Because these business structures offer no liability protection, it is paramount that business owners document their activities carefully in order to protect themselves and their families from the possibility of loss and legal seizure.
Corporations and the Necessity of Entity Management
Whether a business owner chooses to set up a C Corporation or an S Corporation, business owners should be aware that the advantages come with some distinct responsibilities. Both options offer business owners a level of personal asset protection by establishing the business as an independent entity separate from the owners. The corporation itself is therefore responsible for any business debt, and the owner’s personal property is safe from loss or seizure. As a separate body, the corporation can bring lawsuits, buy and sell property, and be taxed. In addition, corporate structures also offer the business the option to raise revenue through the sale of company stock or venture capital initiatives.
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These advantages, however, come at a price. Corporations are costlier and more complex to form and require a higher level of reporting to remain compliant. In order to incorporate a company, business owners must first contact the secretary of state or the state office responsible for registering corporations. These offices advise businesses on the required forms and fee schedules for incorporating in their respective states. The owners or founders will be responsible for filing articles of incorporation, and drafting a set of corporate bylaws, which detail how the corporation will be run. In addition, corporations are responsible for the formation of a board of directors, the election of corporate officers and the initial offering of stock to shareholders. Along with quarterly tax reporting, corporations must also schedule regular board meetings and release annual reports detailing their business activities.
This increased complexity and the legal necessity for detailed documentation require corporations to rely on robust entity management solutions. Entity management is the system of documentation and data organization that keeps the organization operating on a day-to-day basis. From contacts to contracts, entity management provides a sound infrastructure to allow businesses to function efficiently, cleanly and legally.
The Advantages of Entity Management Within Legal Business Structures
One of the biggest advantages that corporations gain from the implementation of entity management systems is the creation of a single, verified source of information for all corporate data. Entity management technology provides secure, authorized access to core entity information and important entity documents, such as charters, contracts and legal proceedings. When a change occurs in personnel or policy, users can make quick adjustments to the appropriate database, and those changes are registered across the organization.
Entity management systems coordinate and maintain all company contacts, policies, processes and regulations. A robust entity management system will provide assistance in four key areas of operation:
- The creation and upkeep of records regarding the fiduciary, regulatory and statutory responsibilities of each individual business entity within the corporation and its directors, officers, managers and partners. Maintaining a verified and up-to-date people list is essential for good governance, specified workflows and secure data management.
- Serving in an advisory capacity to the board of directors, select committee members or members of management in matters of corporate governance. Through the application of entity management software systems, users can quickly compile information that contextualizes mass amounts of data and offers in-depth analytics. This helps ensure that all major decisions are based on the best available, data-driven business insights.
- Maintaining and updating the corporate record to reflect all changes in personnel, transactions, reports and audits. Entity management ensures that all mergers, acquisitions or other fundamental shifts in the organization are adopted successfully into the corporate record. As the corporation grows and evolves, the corporate record remains accurate and reliable.
- Safeguarding access to the corporate record and all allied corporate data. Entity management technology helps mitigate data security risks, providing unparalleled protection for the organization’s internal records and legal documents. Document creation, editing and access are each safeguarded against potential cyberattacks using customizable, role-specific permissions. These permissions provide secure information only to authorized users. As the workforce changes, these permissions are able to change along with it, providing ongoing data security.
Leverage Your Legal Business Structure
Business owners have a host of decisions in front of them as they begin their business ventures. Understanding the relationship between business structures and the necessity of entity management is one step in their evolving business education. For more information on how an entity management system can help your organization, contact a Blueprint representative.