What is a Legal Entity?

Malcolm Tatum
Malcolm Tatum

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.

A business that sells or maintains motorcycles is a legal entity because it can be sued by customers and contract for parts.
A business that sells or maintains motorcycles is a legal entity because it can be sued by customers and contract for parts.

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.

Non profit organizations are legal entities because they have contractual obligations with employees and suppliers.
Non profit organizations are legal entities because they have contractual obligations with employees and suppliers.

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.

A partnership can be considered a legal entity.
A partnership can be considered a legal entity.
Malcolm Tatum
Malcolm Tatum

After many years in the teleconferencing industry, Michael decided to embrace his passion for trivia, research, and writing by becoming a full-time freelance writer. Since then, he has contributed articles to a variety of print and online publications, including wiseGEEK, and his work has also appeared in poetry collections, devotional anthologies, and several newspapers. Malcolm’s other interests include collecting vinyl records, minor league baseball, and cycling.

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Discussion Comments


The United States of America is a legal entity. The government of the United States is not. The government is a non-entity similar to a bird or a plane or an automobile.


@Emilski - If you're running any sort of business where you have employees, it's usually smart to become an LLC in case any of them get hurt on the job. I'd say the only time it is good to be a sole proprietor is if you're doing freelancing or some type of contracted work on your own. Also, the work should be something where you're unlikely to be sued for any significant amount.

As far as setting up an LLC, I've never done it, but I don't think it is very difficult. You just have to identify yourself to the IRS as a limited liability company. After that, I believe you're able to choose your taxation structure and other options.

I'm not an expert in this subject, though, so I would highly recommend talking to a lawyer and tax professional before you get around to doing anything major with this. They'll be much more capable of answering any questions.


I was wondering if anyone here knew whether a limited liablity company (LLC) was considered its own legal business entity. The article mentioned corporations, but I wasn't sure if LLCs fell into that same category.

I am wanting to start my own small business, and a lot of people have told me that it would be wise to sign up as an LLC rather than a sole proprietor. After reading this article, I'm thinking that may be the best way to go so that I can not lose any personal belongings.

What exactly is the process to enroll as an LLC? How is that different from a corporation? Thanks for any help.


@JimmyT - That is an interesting question and one that I don't have the knowledge to answer, but I would be curious to hear if anyone else knows. I am pretty sure that in the case of individuals, if I were to lose a court case and couldn't pay it immediately, I would just have my wages garnished until the amount was paid. With a business, though, someone can't take what doesn't exist.

I'm sure if the judgment were worth more than the company, they'd get all they could from it. The last part of your question is the interesting part, though. If the company went bankrupt and started up again, I don't know if they'd still be liable or not. Another interesting part of that would be if a company folded but then the same individuals started up an almost identical company with a different name.


The article briefly mentions some of the requirements of becoming a legal entity. Does anyone have any more details on this? In the United States, I know there are different types of businesses such as sole proprietors and corporations. Am I correct in assuming that if you were a sole proprietor, you would be able to have your assets seized if you lost a court case?

Something else I was thinking about is what would happen if your business were a legal entity and you lost a large court case, but you didn't have enough money to pay the cost? Would the plaintiff just be able to take all of your property that you did have? Would you then be able to start the business back up without owing anything to that person, or would you still be accountable?

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