The phrase “legal entity” conjures many questions, but few answers. It feels like the embodiment of legalese – somehow both vague and specific, with multiple meanings and no meaning at all. So, let’s try to break it down; legal entities are the various structures under which you may create a corporation. There are S corporations, C corporations, limited liability companies, sole proprietorships, trusts, non-profits and the list goes on. The important takeaway is that any kind of company that has tax filings is a legal entity. This is an oversimplification in some ways, but finding a common thread will aid in the understanding of what a legal entity is.
The main reason to file as a legal entity is for the protection of the corporate veil. The way that legal entities are structured allows for a much greater degree of protection for strictly personal assets from lawsuits and regulatory penalties. Each type of entity will provide a different set of protections and tax burdens, and enable the entity to enter into contracts and assume the obligations of those contracts, to borrow and pay debts, to file suits and be named by other parties in suits, and to be held to account for the results of those lawsuits. While this article will not discuss the types of legal entities and their differences in great detail, you can find a previous post with an in-depth discussion of the three most popular varieties of legal entities here.
Legal Entity Identifiers
Every legal entity is issued a Legal Entity Identifier (LEI). An LEI is a 20-character code that will serve as a reference to connect a company with financial information, whether a transaction or the data that is associated with those entities participates in that transaction. The LEI designation process is far from standardized, however. Over the past decade, there have been attempts to introduce a uniform procedure for assigning LEIs, such as the Global Legal Entity Identifier Foundation (GLEIF), but prior to these efforts, the process of assigning LEIs varied from country to country. GLEIF is backed by a number of powerful financial institutions, as it was introduced in 2011 at the G20 economic forum.1 The effort to collate all LEIs into a database has resulted in GLEIF-backed local and central operating units that assign LEIs within a certain jurisdiction. The LEI is a key feature of your legal entity, regardless of the type of entity.
One reason that LEIs are still not fully standardized, despite the globalized economic world in which we live, is that the laws and regulations that govern legal entities can fluctuate drastically across jurisdictions. There is a well-documented aspect to legal entities regarding the types of entities and where it is most beneficial to incorporate. If you are a sole proprietor with a storefront in Boise, Idaho, your filing is going to be strictly confined to that area. The larger and less anchored to one specific location your entity is, however, the more options you will have to understand in order to maximize your protections and benefits.
Factors in Determining What Legal Structure to Select
These factors – e.g., protection of your assets, tax benefits – are what will allow you to make the choice that will optimize your business model. There will be an intersection of the lines that plot the complexity of your entity type and the advantages you gain from said complexity. As previously mentioned in our discussion on Legal Entity Identifiers, where your business is located will be a real factor in the decision about what type of entity you wish to create. If your business model is selling homemade yarn out of a roadside shack on the outskirts of Ogden, Utah, you might not need to create a legal entity at all. If your business is going gangbusters and you need to open a storefront in the city center, you might consider a sole proprietorship so that you can protect your personal assets from vulnerabilities, such as a lawsuit, for example, if your yarn was incorrectly sanitized and one of your customers gets ringworm. If you are a multinational corporation that has a majority stake in an LLC that produces yarn in Ogden, and want to expand into multinational yarn production by acquiring 20 sheep farms in Uttar Pradesh, India, it would behoove you to investigate the benefits of filing a foreign legal entity. The point is that there are a multitude of options, and we have circled back to where we started, where the term “legal entity” begins to mean very little and too much all at once.
Ultimately, it comes down to protection. Contract disputes make up approximately 60% of the over 20 million civil cases that are filed every year in the U.S. Court system. A legal entity and all of the considerations that come with it, will allow you to protect the assets that belong to you, personally, and to any partners you may have in your business. But with a good legal entity, there are extra considerations that must be taken into account. Managing a legal entity requires an incredible amount of internal paperwork and filings to keep your entity in good standing – it is not an overstatement to say that the paperwork of a legal entity is its lifeblood, and the way the flow of it is managed becomes the nervous system – what paperwork goes where, when and how is of the utmost importance.
What Is a Legal Entity and How to Optimize It With Technology
The best way to manage your documents and, in doing so, protect your business interests on one level and your personal assets on another, is to have in place a quality entity management software. Blueprint OneWorld sets the standard for entity management with the care and precision provided by its dedicated teams of service professionals and the ability to tailor a suite of tools for your company’s needs. If you are interested in the greatest degree of protection for your legal entity, please give us a call or send us an email today.