The business world is full of terminology that may be difficult to understand, especially if you’re just beginning on your business journey. Even if you’ve been operating a business for many years, it may be challenging to interpret all of the legal jargon. However, failure to do so could result in tax troubles.
One of the most frequently used terms in the world of compliance and governance is “legal entity.” This term appears to be both vague and specific, with multiple meanings yet no meaning at all. However, this term is the glue that holds entity management together.
For business law purposes, a “legal entity” is any individual, company, business, or organization that can legally enter into a binding contract with another legal entity. A legal entity can be composed of many people but has the capacity to function in the same way that an individual can, legally speaking. Incorporated businesses generally qualify as legal entities.
What are the Different Types of Legal Entities?
Legal entities are the various structures under which a business is created. There are around 15 types of legal business entities in the United States that each require different variations of legal documents.
Some examples of legal entities include:
- Corporations: The most common type of U.S. corporation is a C-Corporation. C-Corporations offer liability protection, meaning the business owners’ assets are not at risk. The downsides of corporations include heightened regulations and increased tax rates.
- Partnerships: Partnerships are easy ways for business owners to share the responsibilities and profits of a company. A strong partnership agreement outlines the working relationship between the partners from the outset
- Sole proprietorships: Someone who owns an unincorporated business by himself or herself and makes all of the business decisions but takes all of the risks owns a sole-proprietorship.
- Non-profit organizations and charities: Non-profits and charities are organizations that serve a purpose, whether it be educational or religious. They do not earn profits.
- Limited liability companies: LLCs are somewhat of a hybrid between general partnerships and corporations. LLCs offer limited liability assurances similar to corporations without the penalty of double taxation.
- Various other types of business forms
What Can a Legal Entity Do?
As a legal entity, the organization or individual has the capacity to:
- Enter into contractual relationships with other legal entities
- Sue others for failing to uphold contractual duties
- File taxes
On the other hand, a legal entity also holds corresponding legal responsibilities. For example, a legal entity is liable for performing contract terms for any violations that were done in the company name. Legal entities are structured in a way that allows for greater degrees of protection against lawsuits and penalties for personal assets.
Each type of entity provides a different set of protections and tax rules. Legal entities assume the obligations of contracts, pay and borrow debts, file suits and be named parties in other suits, and be held accountable for the results of lawsuits.
How Does Liability Work for Legal Entities?
Although the legal entity can be sued for violations done by the company, the individual members cannot be sued for company violations. This is one of the main features of a legal entity and why people would choose to form a legal entity rather than operate independently (i.e., to have insulation or to buffer from legal liability).
Of course, the liability details will differ for each business form. Also, there are some instances where individuals might be held liable even if the violation involves the overall business (for instance, if they acted independently from the company’s instructions). Many state business laws also overlap with trust laws.
How Do Legal Entities Differ in Other Jurisdictions?
The meaning of a legal entity varies widely depending on the jurisdiction. A legal entity will always be defined as a company or organization that has legal rights and responsibilities, but its ultimate form may differ.
In the UK, to be incorporated, business owners can choose between limited companies, limited liability partnerships, community interest companies, charitable incorporated organizations, industrial provident societies, or financial mutuals, among other types of businesses.
In Australia, the most common types of business structures are unincorporated sole traders, companies, partnerships, and trusts.
In Dubai, companies are registered by category – company, partnership, branch office, or free zone company – and then are incorporated as LLCs, civil companies, joint-venture companies, private shareholding companies, or public shareholding companies.
In South Africa, the primary methods of doing business occur through public or private companies. Personal liability companies, partnerships, business trusts, sole proprietorships, and external companies are also common.
In the Netherlands, business is primarily conducted by general, limited, or professional partnerships or private companies with limited liability as sole traders.
The meaning of “legal entity” doesn’t technically change across different jurisdictions, but the legal entity form and types of legal entities may look different and have varying compliance rules and government regulations.
How Does a Legal Entity Affect Personal Liability?
In the UK or Australia, you could be a sole trader, or in the U.S., a sole proprietorship, and conduct business without forming a legal entity. However, there are distinctions surrounding liability.
Without forming a legal entity, there is no distinction between your business finances and your personal ones. This means that if your company is sued or goes into debt, you could be personally held liable, and your personal assets could be seized to pay off the debts. You could also be sued personally and face financial consequences.
How Should I Choose My Legal Entity’s Name?
A business entity’s name is extremely valuable. A business’s name is how its known in the marketplace. A name is what a business’s reputation is built around and how it conducts trade. However, having a name doesn’t make a business a trademark.
Selecting a good name is a massively important decision that comes with responsibility. Consider seeking legal advice to ensure the name you’ve chosen is compliant with laws restricting business names. All steps needed to protect client’s rights should be completed, as well.
Original legal names must be selected before a business entity can be created. Legal names can be changed in the future, but a business can only have one legal name at a time. Selecting the right name from the outset can save resources and time later on.
How Can Technology Help Manage a Legal Entity?
Legal entities may be required to submit reports to regulators, industry bodies, or government departments on a regular basis. Financial statements, monthly tax filings, or confirmations of information also may need to be submitted.
Staying on top of a legal entity’s regulatory responsibilities can be complex and time-consuming. It’s important to keep an eye on all entity requirements and stay on top of any changes to regulations.
You can use management software to digitize the management of your business by centralizing information. Cybersecurity related to contracts and other documents are important. Technology also helps you manage corporate data, sign documents electronically, and find information instantly. Electronic calendars provide centralized entity management.
Do I Need a Lawyer for Help with Legal Entity Laws?
Every state has very different business laws concerning legal entities and their guidelines. You may need to hire a corporate lawyer if you need help with any questions, disputes, or legal issues involving a legal entity.