5 signs your business may benefit from legal entity rationalization

As businesses expand organically or through acquisition, their legal entity structures often become more complicated than necessary. This usually happens when companies acquire entities, create new ones to meet local regulations in different countries or fail to revisit their structure as the business evolves.

Although some complexity may be unavoidable in the short term, over time it can lead to inefficiencies, tax exposure and operational friction.

Legal entity rationalization (LER) is the process of streamlining a company’s legal structure to align better with its business strategy, reduce risk and improve tax efficiency. But how do you know when to consider it?

Here are five signs that your business may be ready for LER:

1. You’ve grown through acquisitions but haven’t cleaned up your structure.

Mergers and acquisitions often leave behind a patchwork of legacy entities. These may include holding companies, dormant subsidiaries or overlapping operational units that were never fully integrated. While they may have served a purpose during the transaction, they can complicate reporting and increase costs over time.

Each entity requires separate tax filings, governance oversight and financial reporting. This increases administrative burden and audit risk, especially when entities are no longer active or strategically relevant. In some cases, legacy entities may even carry hidden liabilities or outdated intercompany agreements that complicate future transactions.

LER helps identify which entities are essential and which can be merged, dissolved or repurposed. By eliminating unnecessary entities, businesses can reduce compliance costs, improve transparency and position themselves more effectively for future growth or exit strategies.

2. Your entity structure doesn’t reflect your current business model.

As companies evolve by launching new products, entering new markets or shifting operational strategies, their legal structures don’t always keep pace. For example, a business that once operated regionally may now have global operations but still maintain a fragmented or siloed entity structure.

This misalignment can lead to inefficiencies in decision making, tax planning and resource allocation. It may also create confusion among stakeholders, regulators and investors trying to understand how the business is organized.

LER helps align your structure with how your business operates today by organizing entities around current functions, geographies or product lines; locating them where meaningful activity occurs, and eliminating those that no longer serve a purpose. The result is stronger governance, clearer reporting and greater strategic flexibility.

3. You’re implementing a new ERP or finance system.

Enterprise resource planning (ERP) systems are designed to unify business processes across departments and geographies. But a tangled legal entity structure can undermine that goal. If your ERP must accommodate dozens of entities with overlapping functions, inconsistent naming conventions or redundant reporting requirements, implementation becomes more complex and costly.

In fact, many businesses discover structural inefficiencies only when they begin mapping their ERP architecture. This can lead to delays, budget overruns and missed opportunities to optimize workflows.

LER can help ensure your legal structure supports your technology investments rather than hinders them. By rationalizing entities before or during ERP implementation, you can reduce system complexity, improve data integrity and enhance cross-functional visibility.

4. You’re facing rising compliance costs and administrative burdens.

Every legal entity comes with its own set of obligations, such as tax filings, audits, regulatory registrations, board meetings and more. As the number of entities grows, so do the costs and risks. This is especially true for businesses operating across multiple states or countries, where each jurisdiction may have its own rules and deadlines.

Additionally, complexity can lead to missed filings, inconsistent reporting and increased exposure to penalties. It can also strain internal resources, diverting attention from strategic priorities.

LER helps reduce the number of entities and streamline compliance processes. By consolidating operations and aligning structures with business needs, companies can lower costs, improve accuracy and reduce risk.

5. You’re preparing for a liquidity event or restructuring

Whether you’re planning a sale, IPO (initial public offering), spin-off or internal reorganization, a clean and efficient legal structure can be a strategic asset. Buyers and investors often scrutinize entity structures for hidden liabilities, tax inefficiencies and operational redundancies. A convoluted structure can slow due diligence, raise red flags or reduce valuation.

Similarly, internal restructurings, such as centralizing functions or realigning business units, can be hampered by outdated or overly complex entity setups. LER can help you prepare for these transitions by simplifying your structure, clarifying ownership and ensuring tax efficiency.

By proactively rationalizing your legal entities, you can enhance transparency, accelerate deal timelines and maximize value.

Getting started: Legal entity rationalization

Legal entity structures tend to grow organically, often without a clear plan—especially in multinational businesses. Over time, this can lead to unnecessary complexity, hidden costs and operational drag. It’s not uncommon for companies to have annual carrying costs up to $50,000 per legal entity. When multiplied across a portfolio of entities, those costs can quietly erode margins and divert resources from strategic priorities.

A rationalization review helps identify where your structure no longer serves your business and where simplification could reduce risk, minimize compliance costs and improve efficiency across legal, accounting, operations, IT and human resources.

Experienced advisors who understand your global footprint can assess which entities are essential, which can be consolidated or dissolved, and how to align your structure with current operations.

If your structure is weighing you down, it may be time to take a closer look.