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The Diligent team
GRC trends and insights

Best practices for closing down subsidiaries

October 30, 2019
0 min read
Board members discussing best practices for closing down subsidiaries.

Sometimes an entity just isn't needed anymore. Perhaps the business has become unprofitable and it's time to cut your losses. Maybe the market isn't working out and you want to refocus your attention elsewhere. Or it could even be that the larger group structure has gone through a legal entity rationalization process and has a list of subsidiaries that are no longer needed.

Whatever has brought on the need, the key to closing down subsidiaries is to make sure it's done properly, by the book, and in accordance with all local and global regulations; otherwise, you could find yourself still subjected to reporting requirements for an entity you thought was dead.

The risks of not closing down subsidiaries in the appropriate way include still being liable for recurring fees, ensuring all outstanding debts have been settled, dealing with property or other business assets in the right way, and ensuring all licenses and permits have been cancelled with the authorities. Simply closing the doors and moving on could result in serious consequences down the road, and you must instead go through the process of formally dissolving your entity within the jurisdiction in which it was incorporated.

Entity management goes across the whole business life cycle

Entities are not just set up and forgotten about; they require careful management throughout their lifetime. There are the annual accounts to think about, and any regular taxes or employee benefits to keep track of, as well as ensuring all documentation is stored appropriately and the corporate record is available to auditors or regulators whenever they need it.

Once a subsidiary is incorporated, its entity management must then include aspects such as:

  • Officer or director appointments
  • Ownership details
  • Registration requirements
  • Regulatory filings, which differ across jurisdictions
  • Contract and license management

But, of course, even the most successful entities will go through fallow periods, so it's important to continually monitor progress and the state of compliance to ensure subsidiaries continue to perform as needed.

Things to keep in mind when closing entities

While specific best practices for closing subsidiaries will depend on the jurisdiction in which it is incorporated, there are some general guiding principles that should be kept in mind.

Visualize the whole structure first

Creating an organizational diagram can help you to visualize the entire subsidiary structure. Modern technology, such as an entity management platform, can help to highlight legal structure risks, such as whether you have the wrong entity type for local needs, whether the group structure is unnecessarily complex, or whether you're at risk of non-compliance with local regulation on substance or directorships.

Completing an entity diagramming process is an essential step when closing entities and is, in fact, a good practice to undertake on a regular basis ' before issues arise that necessitate closing subsidiaries.

Do it by the book

You'll need a keen knowledge of local regulations before closing entities. Every jurisdiction will require you to follow a specific process to ensure entities are dissolved in the right fashion.

The Board will need to meet and vote to dissolve the business. Then the proper dissolution forms must be filed with the appropriate authorities. Cancel all state registrations or qualifications and get a tax clearance if necessary. There could be more steps depending on where your entity is located, so it's worth checking with the domestic authorities to adhere to the proper process.

For example, the US Internal Revenue Service (IRS) has an official checklist for closing a business that includes:

  • Making final federal tax deposits
  • Filing your final quarterly or annual employment tax form
  • Issuing final wage and withholding information to employees
  • Reporting information from W-2s issued
  • Filing the final tip income and allocated tips information return
  • Reporting capital gains or losses
  • Reporting partners' and shareholders' shares
  • Filing the final employee pension/benefits plan
  • Issuing payment information to subcontractors
  • Reporting information from any 1099s issued
  • Reporting corporate dissolution or liquidation
  • Considering allowing the S corporation election to terminate
  • Reporting business asset sales
  • Reporting the sale or exchange of property used in your trade or business

In the UK, on the other hand, you'll need to ensure you strike off your entity from the Companies Register, deal with debts and put your company into formal administration. It's little things like employee pensions or asset sales that could easily slip through the cracks, so even when closing subsidiaries, you must keep detailed records to the end.

Keep records up to date

Of course, all of this is much easier if you keep your records up to date and have a process of continual monitoring of entity performance. Without access to real-time and up-to-date entity data, organizations risk making the decision around closing entities based on inaccurate information.

Closing subsidiaries is not a process that should be rushed into, but sometimes decisions do have to be made quickly and without delay, so there might not be time to go back and check that each one is correct. Ensuring the Board has the full picture when making the decision ' both in terms of the minutiae of the specific entity and the impact its closure would have on the wider group structure ' will help to ensure the right decision can be made.

How technology can help you track legal entities and subsidiaries

There's a lot to keep track of when you're managing just one entity, let alone a suite of subsidiaries or a large group of entities that span multiple jurisdictions around the world. Subsidiary governance best practices rely on access to robust information that can be delivered in real time to ensure all entity data is up to date and fresh.

When an organization uses entity management software, such as that offered by Diligent, to deliver the data needed to adhere to best practices in governance and compliance, they can access real-time data to enable decision making. This entity data can then be used to track the progress of legal entities and make those all-important decisions about closing subsidiaries or shifting to a new strategy.

Entity management software acts as a single source of truth for the entire organization, driving subsidiary governance best practices and helping inform decision making at all levels. Running reports based on this up-to-date entity data can help to track performance, while entity diagramming and organizational charts can help to visualize the entire structure in order to identify potential weak spots or redundant subsidiaries.

Diligent's entity management software also integrates seamlessly with a board portal and a secure messaging system to create a highly secure Governance Cloud. This helps to ensure the whole organization is singing from the same hymn sheet when it comes to entity data, getting the right information to the right people at the right time to drive growth.

By leveraging entity management technology when closing subsidiaries, organizations can ensure decisions are made based on the best possible available evidence, then get to work balancing the structure and ensuring the other entities are as compliant and efficient as possible to meet corporate strategy. Get in touch and schedule a demo to see how Diligent's technology can support your organization in closing entities and ensuring a better space for growth.


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