What is a Legal Entity?

Definition: A legal entity is an individual or group that has legal rights and duties related to contracts, agreements, payments, transactions, obligations, penalties and sues. The term applies to any kind of organization formally constituted according to the particular set of laws governing the country.

What Does Legal Entity Mean?

A legal entity can be an individual, an association, a company, a partnership or any societal form allowed by the authorized legal framework. In contrast to a natural person, it is a body created at the moment of legal incorporation, with a specific name and personality to the eyes of the legal system. There are different types of legal entities and each one has particular privileges and responsibilities established by law.

For example, a sole proprietor is a kind of legal entity that has the advantage of being low-cost and simple but the individual has no asset protection. That means that any debt can be ultimately paid with the individual assets. In corporations shareholders have limited responsibilities and exposure to liabilities.

Example

Kay Nielt is a middle-age woman who used to be a housewife. Now when her kids are grown, she wants to start a business project. She plans to sell home-made meals to middle-class workers that prefer this kind of meals but do not have enough time to cook or to eat out at noon. Kay needs to hire some employees because the work is expected to be too much for a single person. She also needs to rent a proper space and ask for financial funding to buy the required equipment and tools.

Kay does not like the administrative and legal aspect of the business, she only likes to cook and market the products. Besides that, her husband says that it is appropriate to operate under a legal entity. Being a legally established business, it will be possible to comply with labor obligations and sign contracts with suppliers and customers.