What does Separate Legal Entity Mean?

What does separate legal entity mean?

When you start a business, you must decide on a business structure. Furthermore, that choice establishes your company’s legal obligations. However, is your company a separate legal entity, or SLE? Furthermore, what does it really mean to be a distinct legal entity?

When you and every member of your organization are considered a separate legal entity for legal purposes, you are not the same as your business. An SLE essentially indicates that your personal finances are kept apart and safe from any legal action taken against your company. In addition, partners, shareholders, investors, and stakeholders are all individually safeguarded.

However, only a limited number of business arrangements are legally distinct from individual assets. These include limited liability companies, C corporations, S corporations, and limited partnerships.

You are protected from personal liability if your company is in SLE. Personal safeguards include the following:

• Shareholders are not subject to personal or corporate liability for the activities of the firm.
• Division of personal and business assets and accounting.
• Shareholders cannot be pursued by creditors.

If you’re considering starting a new business with a separate legal entity, please contact our business formation attorney to start an LLC, Inc. or corporation.

What are the advantages of being a separate legal entity?

Being a separate legal entity is important because it shields you, the business owner, from personal liability. This protects you from court proceedings and losing your personal assets. As a separate legal entity, a business also has its own legal rights. As a separate legal entity, a business is able to own property, enter into contracts, and sue other entities.

What is a separate legal entity?

The key word in this phrase is ‘separate.’ So, what does that really mean? Every business should be distinct from the owners, shareholders, members, and other officers of the company. By definition, a separate entity is one that keeps its finances apart from the personal finances of those involved in the company.

When a person starts a company, they are expected to create unique bank accounts, tax identification numbers, and credit card accounts for the business.

However, just being a separate legal entity does not necessarily protect your personal assets if the business faces a lawsuit. Two kinds of companies are separate entities but not separate legal entities. These are partnerships and sole proprietorships.

It should be noted that the law does not generally separate partnerships from people. That said, certain states have allowed for partnerships to be separate from owners’ personal assets. Therefore, whether or not an owner’s personal assets are at stake will depend on the specific kind of partnership. More on that below.

Are partnerships separate legal entities?

Separate legal entity applies to all legally register partnerships except general partnership. dThere are many kinds of partnership structures. Each type has its own legal liabilities you should be aware of. Let’s go over these below:

General partnership

In this kind of partnership, every partner has equal financial and legal responsibility for the company. How this responsibility is divided may be included in a written agreement.

Limited liability partnership

This kind of partnership limits each member’s liability. This way, if one partner is sued, the others are not at risk. Thus, this kind of partnership protects uninvolved parties when there is a dispute.

Limited partnership

This kind of partnership mixes limited liability and general partnerships. In this scenario, at least one partner is both personally and legally responsible for the company and its obligations. Other members are silent partners. This means that they are only liable for how much they invested in the enterprise. Usually, silent partners do not play an active role in managing the business.

LLC partnership

This is simply an LLC with multiple members. Legally, it is treated the same as an LLC.

Keep in mind that when it comes to separate legal entities, the particular state will rule on the relevant legal liability.

How do business owners benefit from a separate legal entity?

The benefit of having a separate legal entity is the personal liability protection it offers. If a company or person sues your business, as the owner you are safe from losing your personal assets. Liability protection means that you won’t lose your home or personal savings to pay off a business’ debts, for example. You also won’t face personal bankruptcy or need to sell your home or car to cover lawsuit expenses.

Let’s look at a few examples that illustrate how a separate legal entity can affect a business owner:

Example 1

Jenny is a sole proprietor who owns a baker. She is the only employee as well as the owner. She is therefore responsible for everything involved in operating the business. Because her company is growing, she takes out a loan to buy a new oven. Since Jenny’s bakery is a sole proprietorship, the bank can seize her home, car, or other personal assets if she can’t repay the loan.

Now, let’s say a customer comes in to buy a muffin and slips at the counter, breaking his ankle. The customer decides to sue Jenny for his injuries. Because Jenny is a sole proprietor, she is forced to sell personal assets to cover the cost of the lawsuit.

Example 2

Luke is a silent partner in an electronics business, with a 25% stake in the company. It turns out that one of the company’s products has a tendency to explode, leading to a lawsuit. Because Luke is a silent partner, his personal liability is limited to his personal investment of 25%. The other partner in the business, who holds 75%, will need to use his own assets to cover legal expenses.

The lawsuit ends up costing $25,000. A quarter of $25,000 is $6,250. This is how much Luke must pay as a silent partner.

Example 3

Harriet runs an S Corp that sells pet supplies. She decides to purchase a property for a new store location. Because her business is an S Corp, it can legally buy property under its own name. Harriet does not need to use her personal information to make the purchase. Rather, she can use the company’s banking information, TIN, and name. The deed to the property will be under the company’s name due to its status as a separate legal entity.