A legal entity is an individual, business, or organization that has the legal capability of entering into a contract with another entity. Essentially, this status makes it possible for a properly incorporated organization to function in the same manner that an individual can, when it comes to entering into binding contracts for all types of goods and services. Along with the ability to legally establish contractual relationships with others, the entity has the responsibility of upholding the terms and conditions of those agreements, or risking the possibility of being sued for failing to honor those contractual obligations.
Just about any type of incorporated business or organization can be considered a legal entity. This includes companies that operate for profit, non-profit associations and other groups, partnerships, and even trust funds. When a business or other organization complies with the requirements put in place by the jurisdiction where it is established, it is normally treated as if the business or organization was an individual. This is true when it comes to matters like paying taxes, obtaining business or operating licenses, and engaging in any type of legal actions.
One key benefit of being defined as a legal entity is that this status makes it possible for legal action to be brought against the company, rather than against the people who own and operate the organization. This is an important distinction, since it usually prevents the private property of the officers or owners of the company from being subject to liquidation in order to settle any legal awards surrounding the business itself. For example, if a court enters a judgment against XYZ Company and authorizes a settlement of $1,000,000 US Dollars (USD) to be paid to the plaintiff, only the assets of the company are held liable for settling that award. The private property held by the owners and officers of that company could not be touched in order to comply with the court’s ruling.
In some countries, there are specific conditions that a business or non-profit enterprise must meet in order to attain this status. While these conditions vary somewhat from one country to the next, most involved obtaining valid licenses to operate, as well as complying with any regulations that are used to define what constitutes a sole proprietorship, partnership, or some form of corporation. A competent business attorney will be knowledgeable about the requirements that must be met, and can advise anyone forming a new business or other operation of how to meet these qualifications.
