What Is a Legal Entity? 5 Facts Business Owners Must Know

What Is a Legal Entity? The Basics

What does a legal entity mean? A legal entity is an organization or structure that has legal rights and responsibilities.

A legal entity can:

• Own property

• Make and sign contracts

• Sue or be sued

• Do business and pay taxes in its own name

Examples of legal entities: 

• A company

• A nonprofit organization

• A government agency

When you form a legal entity like an LLC or corporation, you separate yourself personally from the business. That means that if the company owes money or gets sued, you (as an individual) are usually not personally responsible. 

However, sole proprietorships and general partnerships do not create this separation; therefore, their owners can be personally accountable for their business debts and liabilities.

1. There Are Different Types of Legal Entities

Depending on where you live and how you plan to operate, legal entities vary. Each type offers different levels of liability protection, tax treatment, and complexity. 

Common Types of Legal Entities

Here are some of the most popular structures:

Sole Proprietorship

• Easiest to set up; it isn’t considered a separate legal entity from the owner

• Owned by one person

• There is no separation between you and the business (May still require registering a business name (“Doing Business As or DBA”) and obtaining licenses, depending on your state or local rules.)

• Personal liability for debts and lawsuits

Partnership

• Two or more people share ownership

• General partnerships and limited liability partnerships are common

• Profits and responsibilities are shared

• Shared personal liability for debts and lawsuits

Limited Liability Company (LLC)

• Combines benefits of a corporation and partnership

• Owners have limited personal liability

• Flexible tax options

Corporation (C Corp or S Corp election)

• Strong liability protection

• More complex rules and subject to corporate tax, shareholders may also pay taxes on dividends. 

Joint Venture

• Temporary collaboration between two or more businesses

• Formed through an agreement to pursue a specific project or objective

• Not a legal entity itself, but can be structured to operate through a separate entity (e.g., LLC) or remain purely contractual

Each option has its own pros and cons. The right fit depends on your goals, the number of owners your business has, and the type of protection you require.

2. Your Legal Entity Impacts Taxes

The type of legal entity you choose determines how taxes are paid, who is responsible for them, and whether liability falls on you personally or the business itself. It also determines what tax forms you need to file and how much you might owe.

When it comes to taxes, each legal entity works differently. 

• Sole proprietorships report all business income and expenses on the owner’s personal tax return.

• C corporations are separate taxpayers that file their own returns and can be subject to double taxation.

• S corporations and partnerships pass profits and losses through to the owners’ personal tax returns, avoiding double taxation. However, they are still required to file their own separate tax return.

• LLCs are flexible; single-member LLCs are typically taxed as sole proprietorships, and multi-member LLCs are taxed as partnerships. You can also elect S corporation or C corporation treatment if it suits your goals. 

Taxes can have a significant impact on your profits; it's smart to work with an advisor to figure out the best path.

3. You’ll Need a Legal Entity Identifier

If you plan to operate internationally or work with large financial institutions, you may need a Legal Entity Identifier (LEI). An LEI is a 20-character code that serves as your business's global identifier. It helps improve transparency in financial transactions and informs regulators about who you are and how you're structured. 

While not every business requires an LEI, companies involved in cross-border financial transactions, securities trading, or certain regulated activities usually do.

4. Changing Your Legal Entity Is Possible

A lot of founders think that once they choose a structure, they're stuck with it forever. This is false. Businesses constantly grow and evolve; you might decide to switch your legal entity if you:

• Want to optimize your tax strategy

• Need more liability protection

• Are merging or acquiring another business

For example, you could start as a sole proprietorship and later convert to an LLC or corporation as your business scales. Just remember that changing structures requires careful planning, updated registrations, and sometimes new legal documents. It's smart to consult a professional before making a move.

5. Forming a Legal Entity Takes a Few Key Steps

Establishing a legal entity is a critical step for any business looking to operate in a new state or country. While the process isn't overly complicated, it does require careful planning and strict adherence to local regulations. 

Choosing the right structure, meeting registration requirements, and securing the necessary permits all play a vital role in ensuring your business is legally recognized and protected. Below is a clear, step-by-step guide to forming a legal entity and ensuring you're set up for success:

How to Form a Legal Entity: Step-by-Step

• Check State and Country Requirements: Every state and country has its own unique rules. Check your state's requirements before you begin.

• Pick the Right Structure: Consider your goals, tax needs, and level of liability protection.

• Register Your Business Name: You’ll need to file your name with the state or local government.

• Create Contracts and Agreements: If you have partners, shareholders, or directors, ensure that all relationships are documented in writing to maintain transparency and accountability.

• File Formation Documents: LLCs and corporations need to file articles of organization or incorporation.

• Obtain Licenses and Permits: Ensure you have the necessary paperwork to operate legally.

• Apply for an EIN: This is your business’s tax ID number.

Atlas HXM lets you skip forming your own legal entity by using theirs to hire employees globally. They become the legal Employer of Record (EOR) and handle all compliance, payroll, and HR responsibilities, allowing you to begin operating immediately. 

This service is limited to employment and does not cover broader business operations.

How Atlas HXM Eliminates the Need for Entity Setup

Many companies choose an EOR partner to simplify global hiring. Instead of setting up a legal entity or business in each country, an EOR like Atlas HXM uses its own legal entities to employ your people on your behalf.

With Atlas HXM, you can:

• Skip setting up a legal entity

• Hire employees quickly

• Comply with local labor laws

• Outsource tax and benefits management

• Avoid the cost and time of forming foreign subsidiaries

What Do EOR Service Providers Do?

Here's what Atlas HXM offers under our EOR model to make global hiring compliant and straightforward:

• Legal Employment: Acts as the official employer in 160+ countries using their own entities

• Payroll Processing: Runs compliant, on-time payroll in local currencies

• Tax Withholding & Contributions: Manages all employment-related tax filings and statutory deductions

• Employment Contracts: Drafts locally compliant contracts for each country

• Benefits Administration: Provides country-specific benefits packages and enrollments

• HR Support: Handles onboarding, offboarding, and day-to-day HR tasks

• Regulatory Compliance: Ensures you meet all labor laws, reporting rules, and data requirements

• Intellectual Property Protection: Ensures your company retains full ownership of IP created by employees through locally compliant contracts, jurisdiction-specific IP clauses, and in-country legal oversight in every country where you hire.

• Fast Global Expansion: Allows you to build teams in weeks instead of months

• Single Platform: Central dashboard to manage your entire global workforce

Partner with Atlas Today

At Atlas HXM, we recognize that establishing the correct legal entity and managing it across borders can be overwhelming. 

When you partner with us, you get:

• A trusted global EOR service provider

• Fast, compliant hiring in over 160 countries

• Expert guidance on taxes, contracts, and benefits

• Advanced technology to keep you in control

You don't have to figure out the legal entity definition on your own. Whether you're launching your first company, switching structures, or growing your international team, Atlas HXM has the experience and technology to support you.

Now you know what a legal entity is; contact Atlas HXM to discover how we can assist you to create, manage, and expand your business globally.