A legal entity is a business, company, association or an individual who has the legal capability of entering into an agreement or a contract with another entity. Basically, ‘legal entity’ is a standing which permits corporations to function in the similar manner as an individual can, when it comes to entering into binding agreements for all kinds of goods and services. Other than that, it allows the corporation or the business to form contractual relations with other corporations, the legal entity bears the responsibility of maintaining the terms and conditions of that agreement, or jeopardizing the likelihood of being sued for failing to comply with the agreement obligations.
Can anyone or any company be a legal entity?
Yes, about any type of incorporated business or association is considered as a legal entity. It also includes the companies which operate for profit, non-profit organizations like NGO’s, as well as other associations and groups, even trust funds. When any company or an association obeys the obligations and requirements put in place by the jurisdiction where it was established, it is naturally treated as if the business or association was an individual. It is particularly true in events where we have to pay taxes, attaining legal business or operational licenses, and even in engaging in any sort of legal actions.
How is it beneficial?
There is one key benefit of being labeled as a legal entity, it allows the legal action to be brought upon the company only, and not on its employees who operate and own the company. This distinction is significant as it stops the private property of the owners and employees from liquidation in order to resolve any kind of legal honors surrounding the company itself. For Example, in the event of liquidation of ABC Company, a court passes the judgment to approve a settlement of $1,000,000 to be compensated to the appellant, only the possessions of the company will be apprehended liable to resolve the legal award. The owners or employees private property will not be held liable in settling the legal award.
Although, in some countries there are specific rules and regulations which a company must meet in order to become a legal entity. These conditions may vary from country to country however, majority of them involve obtaining a legal operating license as well as obeying the protocols used to describe what establishes sole proprietorship, form of corporation, and partnership.