Legal Entities and Business

Although in essence this is really a very simple concept, it does make for some interesting discussion points, especially noting that an understanding of how this all fits together, will also help you better understand the legal framework of the various types of businesses you could start.

In essence there are two types of legal entities in the business world. One is a natural person, and the other is a legal person (also known as an artificial person). And if you have heard these terms before, chances are you already have a fairly good understanding of the mechanics of all this, however for clarification I would offer the following descriptions:

Natural Person

A natural person is simply a human of legal age. You are by your very definition a natural person. From a business perspective this would be defined as a human, who is old enough to legally transact (is of age). Usually, depending on the country you live in, older than 18 years going up to 21 years in some countries.

In either case within the framework of this definition you are able to sign a contract on your own behalf, and be bound by it. You do not need to have a parent or legal guardian sign for you, and if you get sued, they can take your house if you lose.

Legal Person (artificial person)

This type of entity has been created to allow for the separation of personal assets from business assets, amongst other things. The key point to consider here is that a legal person is not alive. So a corporation like IBM or Microsoft would be legal person. Even though they clearly exist and can trade they are simply not alive.

A legal person can trade, transact and contract using the registered name as if a natural person, however, since it is not alive, it requires someone (a natural person) to do so on it’s behalf. Essentially since the legal person cannot physically sign the papers, someone living needs to do so. So the manager, CEO or any person with authority to do so, can sign a contract on behalf of the corporation or business, binding it (not the authorised natural person) to the terms of the contract.

Authority for a natural person to act on behalf of a business, is also given by a natural person or persons that own the business (often called shareholders). To explain this more clearly the shareholders hire a CEO to run their business. This gives the CEO the right to sign contracts and do transactions on behalf of the company, and in the name of the company. It also means that if you are the only shareholder, you can give yourself authority to sign contracts for the legal person you own (your business).

A legal person can also own things, just like a natural person, and when the legal person (company) gets sued, they can only take the property of the legal entity, not the shareholders (or business owners).

One key thing to remember is that a legal person can only exist as long as there is a natural person in control of it. So if a company does not have any shareholders, there is nobody that can give authority, to anyone, to transact in the name of the legal person. In this case it also means that there is no one that can actually sign a document in the name of the legal person, making it completely valueless and pointless.

Since a legal person is also not a living thing, you are able to sell it, or give it away like a car. As long as there are shareholders (owners), it can continue to exist.

In conclusion when applying these two simple concepts to your intended business activities, one of the decisions you will have to make, is whether to trade as a natural person (in your own name) or as a legal person (a registered business).

And though often the cost of operating a legal person may prove prohibitive, there are also some inherent protections built into this type of business, which may make it worth biting the bullet for. With this in mind I would recommend that you seek proper legal advice to make sure that you trade in a business form that meets your specific needs.

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