For many, hearing the words “organizational chart” brings to mind a pyramid-shaped diagram showing who reports to whom within the management structure of an organization or business unit. But there is another entirely different type of organizational chart that brings to life the ownership structure of an organization and its affiliated companies. This type of organization chart might be referred to as an entity organizational chart, an entity relationship chart, or a business entity chart.
Imagining the most complicated of organization ownership structures, the entity organizational chart may conjure an image of a huge diagram with entangled lines and sporadic off-shoots here and there, with lots of entity information tucked into each shape that represents each individual legal entity within the parent company organization. If done well, an entity organizational chart for even the most complex business ownership structure is more than just a static cluster of shapes, lines and data. It is a dynamic and organized depiction of what might otherwise appear as complex and fragmented relationships among related entities within an organization.
Entity organizational charts are beneficial for any business that has more than a handful of subsidiaries or affiliated entities. The chart allows board members, management, and their advisors to visualize the relationships among the entities, and it provides an overview of the information pertinent to each one.
The information included on an entity organization chart varies depending on its intended use and the make-up of the organization. At a minimum, it would typically include ownership percentages or shares owned, nature of ownership interest, other affiliations or related-party arrangements between entities, the domestic or “home” jurisdiction of each entity, and tax status.
It may also be useful to create a database of “supplemental information” that links to the entity organizational chart. This database can contain any key information that doesn’t neatly fit on the organizational chart itself or that would clutter it if included. Depending on the business and the type of entities involved, this information might include date of entity formation, foreign jurisdictions where qualified to transact business, management structure, directors, officers, managers, tax identification numbers, former entity names, and trade names. This supplemental information is intended to capture any information that is frequently referenced, so include what makes the most sense for your business.
Entity organizational charts come in handy day-in and day-out. They are especially helpful snapshots for legal, compliance, finance, and senior management teams for highlighting regulatory jurisdictions, evaluating mergers and acquisitions opportunities, considering affiliated service and other arrangements, monitoring levels of foreign investment that might be subject to regulation, completing business filings, and seeking capital from lenders and outside investors.
When creating an entity organizational chart for your business, there aren’t any rules. Determine the format and style that will most effectively convey the information that’s most helpful to have at a glance. Decide which shapes and colors to use and use them consistently. It may seem silly, but this is critical if the entity organizational chart is going to be accurate and easy to use. And be sure to include a key or legend on the chart to guide the user.
Also, the lines on an organization chart have significant meaning. If lines get stacked or cross over one another, the chart becomes more difficult to read and less effective. And pay attention to solid lines versus dashed lines when connecting entities. For example, the use of a dashed line may indicate an intercompany relationship between affiliated entities that is based on something other than ownership, such as where an intercompany loan exists between the two.
For the most basic approach, you can draw your entity organization chart on a piece of paper. This may work just fine if the structure of your organization is fairly streamlined and static. If your business is more complex, with a large number of affiliated entities or frequent ownership or structural changes, then using available charting technology would be a better option.
A well thought out and updated entity organizational chart can facilitate effective decision-making and compliance efforts. Creating one will be an investment of time and may require outside resources with experience developing entity organizational charts and gathering the necessary information for the chart. It will be well worth the investment to have one of these charts at your fingertips. Guaranteed.