What is a legal entity/person
A legal entity, also referred to as a legal person, is a legally constituted organisation that holds distinct identity from its members or owners and possesses capacities similar to those of a natural person. This means that a legal entity can enter into contracts, incur debts, and be answerable in lawsuits, separate from the individuals who constitute or manage it.
In Australia, examples of legal entities include:
- The Commonwealth, State and Territorial governments, and their departments
- Local councils
- Registered companies, such as Pty Ltd (proprietary limited companies), public companies, and not-for-profit entities such as cooperative and mutual organisations
- Trusts and foundations
When an organisation is legally recognised as a ‘person’, it entitles the entity to participate in legal proceedings, be it as a claimant or as a respondent. As such, legal entities bear their own financial and legal accountabilities.
One distinctive case is the sole trader business structure. In this instance, there is no legal distinction between the individual owner and the business entity, which entails the proprietor bearing unlimited personal liability for the business’s actions and debts.
In contrast, forming a proprietary limited company (abbreviated as ‘Pty Ltd’ in Australia) offers the benefit of limited liability. This means that the company itself, rather than the individual owners or shareholders, is responsible for its debts and legal obligations, up to the extent of the company’s assets, with personal liability generally insulated, save for cases of wrongful or fraudulent conduct.
In Australia, Limited Liability Companies provide a structure whereby the shareholders’ financial exposure is limited to their respective input of capital into the business. This means that the personal assets of the shareholders are protected, and they are only liable for the company’s debts up to the amount they have invested.
The governance of such entities, particularly Pty Ltd companies, is a critical undertaking as the company is a separate legal identity. The board of directors is charged with the duty to oversee the company’s activities, ensuring it operates in a financially sound and legally responsible manner.