Legal entities in the business world come in many forms. They can be people, businesses, or organizations with specific legal responsibilities. Local city councils, regional or state governments, and national or federal governments can set these duties. It has evolved over the years but remained relevant based on the need for a structured business environment. Legal entities establish legal structures capable of operating within federal, state, and local laws.
What is a Legal Entity?
The definition of legal entities, which are companies, organizations, and individuals who conduct their affairs within the limits of legislation provided by the local, state, and federal authorities, are recognized as legal persons. This means that in legal contexts, they are considered another ’person.’
For example, a company is a legal entity. It has autonomous rights in the following ways: it can own its property, make contracts, be sued, or sue like any other person.
Types of Legal Entities
Here are some common types of legal entities:
Corporations
A corporation is a legal personality owned by shareholders, and its stocks are its property. Of the two companies, a corporation provides protection against personal loss and funds through the sale of stocks. Nevertheless, the choice of this type of taxation is quite limited for corporations as they have numerous and frequently contradictory rules, which often result in double taxation.
Limited Liability Companies (LLCs)
An LLC combines features of both corporations and partnerships. It offers protection from personal liability and allows flexible management. LLCs can choose how they want to be taxed—like a corporation or a partnership. They are popular among small and medium-sized businesses.
Partnerships
These involve multiple people carrying out a business venture as they form partnerships.
- General Partnerships: Mutual obligation: It also holds that all partners have equal accountability regardless of their contribution.
- Limited Liability Partnerships (LLPs): Most partners can have limited liability, meaning they can not be held responsible for certain types of debts or legal cases.
Joint Ventures
Joint ventures are partnerships by two or more companies for a project intended to last as long as the time needed to complete it. Both companies remain legally separate but collaborate and split any resources/income from the project.
How to Set Up a Legal Entity
- Obtain an Employer Tax ID Number (EIN).
- Apply for business licenses and permits.
- Prepare necessary documents (e.g., Articles of Incorporation).
- Choose the right legal entity.
- Register your business name.
Legal Entity Examples
Corporations
Big companies like Apple are corporations. Shareholders own them, and these shareholders are not personally responsible for the company’s debts or problems.
Limited Liability Companies (LLC)
Your local coffee shop is often an LLC. This type of entity protects the owners from personal liability and usually offers simpler management and tax benefits.
Partnerships
A well-known example is Ben & Jerry’s. Ben Cohen and Jerry Greenfield started their ice cream business together. They shared the work and the profits equally.
Joint Ventures
A joint venture is the formation of an alliance between two companies with a view of undertaking a single project. Both partners typically operate within or are significantly impacted by the supply chain, sharing in its processes, risks, and rewards. For example Sony with Ericsson joined to form Sony Ericsson in producing mobile phones. Neither company merged their identities into a single company for this project, they remained operating independently.
The choice of legal entity is one of the most critical decisions in business. It affects your liability, taxes, business conduct, and fundraising. Knowing the kinds of legal entities, their features, and examples will help you make informed decisions about your goals.
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