A legal entity is a formally registered business structure recognized by government authorities as a distinct legal identity. Legal entities can own property, enter contracts, sue and be sued, and have legal obligations separate from their owners.
Types of Legal Entities
Corporations
- C Corporation: Standard corporate structure with shareholders, board of directors
- S Corporation: Tax election allowing pass-through taxation
- B Corporation: Benefit corporation with social impact requirements
- Professional Corporation (PC): For licensed professionals (doctors, lawyers, accountants)
Limited Liability Companies (LLCs)
- Hybrid structure combining corporate liability protection with partnership tax treatment
- More flexible management structure than corporations
- Single-member LLCs (one owner) vs. multi-member LLCs
- Series LLCs (in some states) create separate liability shields within one entity
Partnerships
- General Partnership (GP): Partners share liability and management
- Limited Partnership (LP): General partners manage; limited partners invest
- Limited Liability Partnership (LLP): Partners have liability protection
Other Structures
- Nonprofit corporations: Tax-exempt entities for charitable purposes
- Cooperatives: Member-owned businesses
- Trusts: Legal arrangements for holding assets (not always considered entities)
Legal Entity vs. Business
Not all businesses are legal entities:
Sole proprietorship
- Legal Entity?: No
- Liability: Personal
- State Registration: No (business license only)
General partnership
- Legal Entity?: Sometimes
- Liability: Personal
- State Registration: Varies
LLC
- Legal Entity?: Yes
- Liability: Limited
- State Registration: Required
Corporation
- Legal Entity?: Yes
- Liability: Limited
- State Registration: Required
A sole proprietor operating as "Smith's Auto Repair" is a business but not a separate legal entity—the person and business are legally the same.
Creating a Legal Entity
- Choose entity type based on liability, tax, and operational needs
- Select state of formation (often Delaware, Wyoming, or home state)
- Choose a unique name that meets state requirements
- File formation documents with Secretary of State
- Appoint registered agent for service of process
- Pay filing fees and any initial taxes
- Receive certificate of formation/incorporation
What Gets Registered
- Legal entity name (must be unique in the state)
- Entity type
- Registered agent and address
- Principal office address
- Initial officers/directors (varies by state)
- Purpose (general or specific)
Legal Entity vs. Trade Name
The legal entity name is the official name registered with the state. This often differs from the trade name customers see:
ABC Holdings LLC: "The Corner Bakery"
Johnson & Smith PC: "Downtown Legal Services"
123 Main Street Inc: "Main Street Hardware"
Legal entities can operate under multiple trade names. Trade names must typically be registered as DBAs.
Legal Entity in KYB
Verification
Verifying a legal entity involves:
- Confirming existence via Secretary of State records
- Checking status (active, dissolved, suspended)
- Matching identity to applicant-provided information
- Identifying officers/owners where disclosed
- Connecting to trade names if applicable
The Challenge
Legal entity verification faces complications:
- Name variations: "LLC" vs "L.L.C." vs "Limited Liability Company"
- State fragmentation: Same business may have filings in multiple states
- Trade name confusion: Customers know the trade name, not legal name
- Stale data: State records may not reflect current ownership
What Legal Entity Status Reveals
Active/Good Standing: Current on filings, authorized to transact
Administratively Dissolved: Failed to file reports; may be revivable
Voluntarily Dissolved: Owners chose to end the entity
Suspended: Tax or compliance issues; cannot transact
Merged: Combined with another entity
Legal Entities and Ownership
Direct Ownership
Individuals own shares or membership interests directly in the legal entity.
Nested Ownership
Legal entities can own other legal entities:
- Holding company owns operating subsidiaries
- Parent corporation owns subsidiary corporations
- Complex structures with multiple layers
This nesting creates UBO verification challenges—the legal owner of an entity may itself be an entity.
Privacy Considerations
Some owners use legal entities for legitimate privacy:
- Real estate holding companies
- Family asset protection structures
- Business separation from personal identity
Others use layered structures to obscure ownership for less legitimate purposes.
Key Takeaways
- Legal entities are formally registered business structures with state governments
- Not all businesses are legal entities—sole proprietors aren't separate legal identities
- Legal entity names differ from trade names—customers see one, the state sees another
- Entity verification starts with Secretary of State but requires additional data sources
- Nested ownership structures complicate beneficial owner identification
Related: Sole Proprietor | Trade Name | Secretary of State | UBO
