Legal Entity Definition

A legal entity is any organization, group, or individual which municipal, regional, or national rulings are obligated to follow by the laws.

In a business perspective, legal entities are invaluable: they create structures and responsibilities for how one would operate a business, an organization, or even an individual within the legal framework. By creating a legal entity, you ensure that possible threats do not reach your personal assets and that your business operation is within the boundaries set locally, at the state level, and at the federal level.

Any business enterprise, institution, or individual who, under the regional, state, and national legislation, dedicates themselves to undertaking business honestly throughout their working life is a legal entity.

Under the legal code, for example, a company is considered an individual entity. As such, the business enterprise can own property, enter into contracts, and bring civil actions as well as be sued in civil court or criminal court for its actions.

Types of Legal Structures

Consider the most common legal structures you should know about:

• Corporations: It is an incorporated independent legal entity with shareholders as its owners and is said to provide limited liability protection to its members. Selling shares has become a common way for many large enterprises to raise capital. Once they do so, they find themselves subject to complicated regulations and overlapping tax burdens.
• Limited Liability Companies (LLC): Striking a balance between corporations and partnerships, introducing an added level of partial liability protection and flexibility in management, an LLC can be taxed as a partnership or as a corporation. About 1.1 million of those have 100 or fewer employees and are poised for considerable growth.
• Partnerships: Partnerships are formed when two or more partners come together to operate one business, creating a compatible and profitable organization. Partnerships come in different types: general partnerships, where each partner has unlimited liability, and limited liability partnerships, where some of the liabilities are limited for the partners in that venture.
• Joint Ventures: Joint ventures are short-term partnerships made between some or both companies for a particular investment. Firms have their own separate legal identity but share resources and work together. They pool their money for the better advantage of all the parties concerned.

How to Form a Legal Entity?

Ready to register your legal entity? Here are some convenient steps:

• Get Employer Tax ID Number (EIN) for making tax payments.
• Secure business licenses and permits.
• Prepare documentation to comply with the law, such as Articles of Incorporation or Partnership Agreements.
• Choose Legal Form of Business.
• Register a DBA with the relevant authorities.

Legal Forms of Business Ownership Examples

Feeling a bit overwhelmed? Don’t worry! For an enhanced understanding of how legal entities work, let’s take a look at some real-life cases.

• Corporations: While many firms talk about having many branch products, few have the staying power it would seem Apple is blessed with. Without much liability to accidents or misfortune at work, a widely dispersed ownership structure makes it possible for the control of companies to be effectively held by their shareholders, and thus the owners are not liable for much.
• Limited Liability Companies: This form of legal structure is highly straightforward, and one can find it nearly everywhere. Your local friendly coffee shop is likely a Limited Liability Company (LLC) that benefits developers by reducing liability and taxing effects, lowering the paper burden on the management side, and ensuring a quality of life for management while running the business. A notable example is Ben Cohen and Jerry Greenfield’s joint venture, Ben & Jerry’s, where responsibilities and gains were divided between the two alone.
• Joint Ventures: A joint venture is when a parent company and its subsidiary carve out new product lines. Neither a parent company nor a dependent puts in all resources, risks, and profits from this venture. An example is the Sony Ericsson Company—a joint venture of Sony and Ericsson—that manufactures mobile phones, each maintaining its own image while working together on this specific venture.

Conclusion

And that’s it! That’s all you need to know about a legal entity. By now, you should understand the purpose and importance of a legal entity. It provides a structured approach to managing businesses and individuals within the legal framework, ensuring protection and compliance.