In the world of commerce, the legal entity of a business refers to the official business structure it operates under. It could be a sole proprietorship, a partnership, a corporation, a limited liability company (LLC), or any other form of business organization. This legal structure determines many aspects of a business, including its revenue, asset size, number of shareholders, tax obligations, and governance etc.
Understanding a business's legal entity is vital for many reasons. Let's look at how this knowledge can help your day-to-day work or business and potentially save you a lot of problems.
KYC Onboarding
Identifying a business's legal entity can tell you the level of risk involved. For example, checking whether a business you are working with has been officially registered with the authorities has to be the first step in any business dealings. It should also be noted that as a sole proprietorship, the owner has unlimited liability. If the business fails, the owner's personal assets could be used to pay off any remaining debts. On the flip side, corporations and LLCs provide limited liability protection, protecting owners' personal assets from business debts.
ICP Prospecting
Understanding a business's legal structure can give you insights into its size. If a company is registered for sales tax, it's reached the minimum earnings required by tax authorities to collect tax on the sale of goods and services (GST). Also, working with corporations might need more formal communication and approval processes, while smaller setups like sole proprietorships might be more informal.
Credit De-risking
Keeping an eye on any official changes filed by a business's legal entity can help you avoid bad business decisions. For example, if your client's business has recently filed for liquidation, it would be crucial for you to stop offering them credit.
I hope you can now see that understanding a business's legal entity is more than just important; it's a strategic step in running a business effectively. It gives you a clearer picture of the business's liability, tax duties, structure, and operations. So, before you start any business relationship, be sure to understand the business's legal entity. This simple step could save you a lot of trouble in the future.
