A legal entity is any business, organization, or individual that must fulfill legal responsibilities per local, state, and federal governing authorities.
Legal entities play an essential role in the business world. They define how the structure and responsibilities of a business, organization, or individual must operate within the legal framework. Creating a legal entity not only safeguards your assets but also ensures your business operations remain compliant with local, state, and federal rules.
In this piece, we’ll delve into the various types of legal entities, the process of establishing each, and show some examples to make the concept crystal clear. Plus, we’ll introduce you to OnBoard, an amazing board management software platform that is sure to take your board’s effectiveness to new heights.
What is a Legal Entity?
A legal entity refers to any business, organization, or individual that’s required to meet legal obligations as set by local, state, and federal laws. Think of it as a separate “person” in the eyes of the law. It can own property, sign contracts, sue or be sued, and be held accountable for its actions.
Types of Legal Entities
The world of legal entities is chock-full of options to choose from. Let’s break down the big four:
- Corporations: A corporation is a separate legal entity owned by shareholders, providing them with limited liability protection. Corporations can raise capital by selling shares, making them a popular choice for large businesses. However, they often face complex regulations and double taxation.
- Limited Liability Companies (LLCs): An LLC combines the benefits of a corporation and a partnership. It offers limited liability protection and flexibility in management, with the option to be taxed as a partnership or a corporation. LLCs are popular among small and medium-sized businesses.
- Partnerships: A match made in heaven, partnerships are formed when two or more individuals join forces to run a business. There are different types of partnerships, like general partnerships (where partners share equal responsibility) and limited liability partnerships (where some partners enjoy limited liability). Just be sure to create a solid partnership agreement agreement.
- Joint Ventures: Think of joint ventures as temporary partnerships between two or more businesses, formed to achieve a specific goal. Each business maintains its own legal identity, but they collaborate and pool resources for the greater good (or at least, their own profit). Joint ventures allow businesses to share risks, costs, and profits, making them an attractive option for large-scale projects.
How to Form a Legal Entity
Ready to form your own legal entity? Different entity types have different requirements, so you’ll need to do your homework. The Small Business Administration is a great place for seeking guidance from professionals who can help you navigate the maze of legalities and regulations. Some common steps include:
- Choose the right legal structure for your business.
- Register your business name with the appropriate government agency.
- Obtain necessary licenses and permits.
- Draft necessary legal documents, such as Partnership Agreements or Articles of Incorporation.
- Obtain an Employer Identification Number (EIN) for tax purposes.
Legal Entity Examples
Feeling a bit overwhelmed? Don’t sweat it! Here are some real-world examples to give you a better idea of how legal entities work:
- Corporation: Apple is a prime example of a corporation. It’s owned by shareholders and has limited liability for its owners.
- Limited Liability Company (LLC): Your friendly neighborhood coffee shop might be an LLC, providing the owners with limited liability and tax benefits while maintaining a more relaxed management structure.
- Partnership: Ben & Jerry’s started as a partnership between two ice cream enthusiasts, Ben Cohen and Jerry Greenfield. They shared responsibilities and profits while scooping their way to success.
- Joint Venture: One example of a joint venture is a holding company collaborating with a subsidiary company to develop a new product line, sharing resources, risks, and profits. Another real-world example is Sony Ericsson, a joint venture between Sony and Ericsson, two tech giants who collaborated to produce mobile phones. Both companies maintained their separate identities while pooling their resources for this specific project.
Getting Started With OnBoard
Now that you’re a legal entity aficionado, let’s talk about how board management software can help you increase board intelligence and effectiveness.
OnBoard’s board management software provides a cloud-based platform to store and manage board documents, including confidentiality agreements, board agendas, and meeting minutes. OnBoard also powers real-time collaboration and communication between board members, increasing productivity and improving decision-making.
OnBoard comes equipped with the following board management features:
- Industry-leading security, compliance, and data protection that’s certified and accredited
- Agenda Builder and Minutes Builder for simplified meeting administration
- Secure Messenger and Zoom Integration to enhance communication
- Board Assessments to empower boards to measure their performance against the organization’s goals
Check out our Board Management Software Buyer’s Guide to see what OnBoard can do for your business.
Frequently Asked Questions (FAQ)
1. What is the Most Common Type of Legal Entity?
The most common type of legal entity varies depending on factors like location, industry, and business size. However, in the U.S., entrepreneurs and small businesses often opt for Limited Liability Companies (LLCs) as their legal entity of choice. This is due to the LLC's ability to offer flexibility, limited liability protection, and tax benefits.
2. Can a Legal Entity Have Multiple Owners?
Depending on the type of legal entity you choose, multiple owners are not only possible but quite common. For instance, partnerships and LLCs are designed to accommodate multiple owners, who are known as partners or members, respectively. Even corporations can have numerous shareholders who own portions of the company.
3. What are the Main Differences Between a Sole Proprietorship and an LLC?
A sole proprietorship is the simplest business structure and is owned and operated by a single individual. The owner and the business are considered the same legal entity, meaning the owner is personally liable for the business's debts and obligations. On the flip side, an LLC separates the owner(s) from the business, providing them with limited liability protection. Additionally, LLCs offer tax advantages and flexibility in management structure, making them a popular choice for small businesses and entrepreneurs.
4. How Does a Legal Entity Affect Taxes?
The type of legal entity you choose can significantly affect how your business is taxed. For example, corporations are subject to double taxation —the company pays taxes on its profits, and shareholders pay taxes on dividends they receive. LLCs and partnerships, however, are typically taxed as pass-through entities, meaning the business' profits and losses are passed through to the owners, who report them on their personal tax returns. This helps avoid double taxation and can be a major advantage for some businesses. It's important to keep in mind that tax laws can be quite complex, so it's advisable to seek the guidance of a qualified tax professional to ensure you're making the best choice for your situation.
Now you're armed with the knowledge to embark on your own business adventure, whether you're looking to form a corporation, LLC, partnership, or joint venture. And don't forget to check out OnBoard for all your board management software needs. To delve deeper into specific topics, explore our articles on how to reincorporate a business and corporate governance.
About The Author
- Josh Palmer serves as OnBoard's Head of Content. An experienced content creator, his previous roles have spanned numerous industries including B2C and B2B home improvement, healthcare, and software-as-a-service (SaaS). An Indianapolis native and graduate of Indiana University, Palmer currently resides in Fishers, Ind.
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