Concept of Separate Legal Entity: Definition, Benefits and Importance
Possession of legal rights and obligations determine one’s entitlement to an organisation’s modes of operation. Holding the statute of a separate legal entity means enabling that individual, company, or limited liability partnership to enjoy its individual legal status. Essentially, being a separate legal identity allows them to identify as a standalone legal structure devoid of their connections with a company’s founders, directors, or shareholders.
This article discusses the legal statute of such entities and explores their difference from regular legal entities.
What Is a Separate Legal Entity?
The primary meaning of a separate legal entity is to exert its impartial approach to legal disputes that an organisation or individual has. Such legal entities are governed by separate laws that enable them to enter contracts, own properties, or begin legal proceedings with detached accountability.
How Does Being a Separate Legal Entity Help Business Owners?
The definition of a separate legal entity or SLE states that companies acting as separate legal entities can guard themselves against the personal liabilities of the owners or shareholders.
The separate legal entity of a company status enables joint venture companies to enable distinct projects. Joint venture companies carry some inherent purposes with which they can make profits. Since they have their own assets, properties, intellectual properties, customers and suppliers, they can isolate their liabilities. These entities can also deliberately fail and be dissolved without affecting the founding members.
However, the most crucial feature of SLEs is their favourability to investors. Employees obtaining a stake in the company hold them independently, irrespective of the company’s financial condition. These corporations exist differently from their owners; stocks and shares can change hands and thereby help them raise capital for new projects.
Importance of a Separate Legal Entity
Small and medium-sized business owners can benefit from becoming SLEs in various ways. The following points justify the need to obtain an SLE status:
- Rights: Although SLE is not necessary for all business types, an individual holding such status can keep property rights and fight legal prosecutions.
- Legal framework: The legal framework prefers the existence of SLE because it gives such entity holders more protection in court. Cases of fund misappropriation, breach of judiciary duties or other criminal attempts can give SLEs more power to defend themselves. It is because of their status, which is different from the enterprise in question.
In the legal framework, companies act as separate entities. Moreover, business owners are liable to pay taxes only on their salaries, bonuses, and dividends. However, corporations pay corporate taxes differently from individual taxation. This helps remove instances of double taxation.
- Exemption: A separate legal entity is exempt from dealing with annual filings, shareholder meetings and regular maintenance. Also, SLEs are not responsible for the company’s defaulted payments. The company is thereby not free to freeze personal assets to cover its liabilities.
- Operation: An SLE status helps maintain consistency and creates an identifiable persona for the organisation. Thus, business enterprises can continue operating despite the death or removal of the owner. Only a legal procedure can negate that status. Thus, the ‘identifiable persona’ creates a legal liability that includes the company’s intangible assets like a franchise, exclusive rights, reputation, and intellectual properties.
Benefits of Separate Legal Entity,
Some special uses of adopting a different legal status include:
- The legal definition of SLE represents the dichotomous nature of an SLE. They can act independently from the organisation and its building blocks.
- Individuals or business owners may choose a separate entity status to minimise their liability and separate their functioning from that of the business enterprise.
- Dealing with business finances becomes more accessible because it formalises the management structure. Companies can free themselves from lawsuits with a clear separation of entities.
- Judgements against a corporation do not affect its shareholders. Thus, a separate legal entity can retain its assets in case of judgements against the enterprise.
- Separate legal entities enjoy a perpetual existence that does not dissolve when owners leave. The company does not let the absence of prosecution of an individual or shareholder affect its status. Moreover, separate legal entities are therefore not legally liable to hold the burden of taxation or unpaid loans on them.
Separate Legal Entity vs Limited Liability
When a business venture separates its members and owners from its entity, SLEs are formed. Thus, the company is a separate individual when it faces legal suits and does not involve its owners or shareholders.
Limited liability partnership firms extend their liability to the personal assets of the owners or shareholders. Thus, an LLC acts like a legal individual backed by creditors managing liabilities and raising capital. If they become separate entities, these firms can accrue debts, hire employees and deal with their assets with detached accountability.
Why Have a Separate Legal Entity?
The primary reason for adopting a different legal status is the separation of business liability from its individual owners. Thus, being a separate legal entity means cases of debts and lawsuits can be deterred from the business organisation without bothering the individuals.
You should consider entering a separate legal entity status:
- Liability protection for a business venture is an expensive affair. Firms may enter legal battles and lose their assets. The SLE status shields them from such liabilities in adverse situations.
- Since business owners are shielded from liability shocks, creditors cannot take legal action against them. Individuals are, therefore, also not required to pay insurance for liabilities.
- Sometimes, differentiating personal and business assets is difficult. A separate legal entity acts as a corporate veil to define the extent of these terms.