A legal entity is a term used to refer to a legal subject that’s not a physical person, such as a business.
A legal entity—also called a legal person—is an entity that’s allowed to enter into contracts and agreements as if it were a real, physical person.
For example, if you’ve set up a business, and you take on a long-term project with a client it’s your business that signs the contract, not you as an individual.
Examples of a legal entity
Examples of legal entities includes
- state, municipality, county municipality, and organizations subject to these
- businesses
- foundations
Sole traders—also called freelancers or contractors—are not considered separate legal entities. This means that if you haven’t set up a business, you as an individual will be legally responsible for debts and liabilities. Some people still prefer this set-up though, because there is less administrative work if you don’t set up a company.
What’s right for you depends on your ambition, how much risk you’re going to take, and how much administrative work you’re willing to do. If you want specific advice regarding your situation, you can speak to an accountant.
See also: Key differences between a sole trader and a limited liability company
What are the benefits of structure?
Legal entities are financially and legally responsible for themselves. A legal entity can sign contracts, incur debts, and is also answerable in the case of lawsuits. If the business incurs debt, the business’ assets can be sold off to cover the debt, but your personal belongings can’t be touched.
This concept is why one of the main types of business entities is called a limited liability company. It has limited liability, because you as the owner cannot be held liable for debts or lawsuits. Of course there are exceptions to this—if you’ve deliberately run your company in a way that endangers others, for example, you can be held responsible alongside your business.