Whether you’re just starting out in the world of business or have been operating for years, there is a very specific suite of terminology that gets employed. It can be a minefield for the uninitiated, and often those who’ve been in it for years will assume you understand all of the jargon. If you don’t, and you just smile and nod, you can get caught out come reporting time.
One of the most basic and most-used terms in the world of compliance and governance is that of the legal entity; it gets into every nook and cranny, something like the glue that holds entity management together. Without a legal entity, there is no entity to manage. But what is the meaning of a legal entity, and why is it so important to the compliance and legal operations teams?
What is the meaning of a legal entity?
According to the Cambridge Dictionary, a legal entity is: “A company or organization that has legal rights and responsibilities, for example the right to make contracts and the responsibility to pay debts.” The Law Dictionary goes one step further, saying a legal entity is “a lawful or legally standing association, corporation, partnership, proprietorship, trust or individual [that] has legal capacity to: (1) enter into agreements or contracts; (2) assume obligations; (3) incur and pay debts; (4) sue and be sued in its own right; and (5) be accountable for illegal activities.”
You can see, then, that a legal entity is, in effect, what the uninitiated would consider to be a company – it’s something that can operate in the business sphere, can enter into contracts either as a vendor or a supplier, and importantly it is something that can sue or be sued in a court of law. When asking what the meaning of a legal entity is, the answer is “something that can be held responsible for the legal obligations of a company.”
An important distinction: legal entity and personal liability
Those entering the business world will often choose to form a legal entity, but they don’t have to. Every jurisdiction has their own types of legal entities, but they also have the ability for a small business to operate without forming a legal entity.
In the UK or Australia, you could be a sole trader, or in the US a sole proprietorship, and still be able to do business without forming a legal entity. The important distinction here, though, is around liability. Without a legal entity, there is no line between your business finances and liabilities and your personal ones. That means if your company is sued or goes into debt, you could be held personally liable for this; your personal assets could be seized to pay the debt, or you could be sued personally and face the consequences.
If you’re selling your homemade crafts on Etsy, you probably don’t need to know the answer to the question, “What is the meaning of a legal entity?”; if you’re a startup that’s ready to move from talk to action, though, it’s a good idea to consider the type of legal entity that best suits your company.
How do legal entities differ across jurisdictions?
Another important point to note is that the question, “What is the meaning of a legal entity?” can differ across jurisdictions. While a legal entity will always be defined the same way – that is, as a company or organization that has legal rights and responsibilities – its ultimate form can differ. To give an example, let’s take a whistle-stop global tour of legal entities:
- In the US, there are around 15 types of business legal entity, from a general or limited partnership through to a C-corporation, S-corporation or B-corporation. There are also nonprofits as cooperatives, as well as partnerships and limited liability companies.
- In the UK, to be an incorporated entity, you can choose a limited company (limited by guarantee or shares), a limited liability partnership (LLP), a community interest company (CIC), a charitable incorporated organization (CIO), an industrial and provident society, or a financial mutual, among others.
- In Australia, the four most common types of business structures are sole trader (unincorporated), a company, a partnership, and a trust.
- In Dubai, which can differ from the other Emirates, companies are registered by category – company, partnership, branch office or free zone company – and are then incorporated as a limited liability company, a civil company, a joint-venture company, a private shareholding company or a public shareholding company, though this is an extreme simplification of the process there.
- In South Africa, the principal methods of doing business are through a public (Ltd) or private (Pty Ltd) company; a personal liability company (Inc); a partnership, business trust, sole proprietorship or an external company (a branch of a foreign company).
- Over in The Netherlands, business is done by a general, limited or professional partnership, a private company with limited liability or as a sole trader.
While the question, “What is the meaning of a legal entity?” doesn’t technically change across these jurisdictions, the ultimate form that the legal entity takes can look different and have different compliance and governance implications.
How can technology help answer the question: “What is the meaning of a legal entity?”
Whether you have one legal entity or are managing multiple entities across the world, entity management and entity governance are of utmost importance to your compliance status. After all, legal entities don’t manage themselves.
While responsibilities and requirements differ depending on the jurisdiction in which the legal entity is incorporated, you can guarantee each legal entity will need to submit some form of report to regulators, industry bodies or government departments on a semi-regular basis – be it annual financial statements, monthly tax filings or confirmation of director information.
Keeping on top of all of your legal entity’s regulatory responsibilities can be both time-consuming and complex, especially once you add into the mix multiple entities within one corporate structure. It’s important that compliance and legal operations teams approach managing these entities from an entity governance point of view; this means keeping a strategic eye on all entity requirements and being able to forecast any downstream impact of changes to regulation or responsibilities.
The best way to work with an entity governance approach is through harnessing technology for your entity-based operations. Diligent’s entity management software helps to digitize your entity management practice by centralizing information, ensuring your organization’s compliance with all local, state and global regulations. It creates a single source of truth for all entity-related information, from contracts and other documents to director information and compliance calendars. Plus, it helps you automate process chains, find information instantly, manage corporate data and appoint a signing authority.
Schedule a demo to discover how Diligent’s entity and board management software can help keep your legal entities on a sound compliance path.