Key Takeaways

  • An individual entity refers to a legally recognized individual or single-member business structure.
  • Sole proprietorships and single-member LLCs are common examples of individual entities.
  • Choosing the right entity impacts legal liability, tax obligations, and operational flexibility.
  • Corporate entities offer limited liability but come with more regulatory complexity.
  • Individual entities are simpler to manage but expose owners to personal liability.
  • Individual and entity equity differ in ownership structure and asset protection.
  • The concept of corporate personhood grants legal rights to corporations similar to individuals.

An individual entity is a business type that's treated as a separate legal entity. This usually refers to corporations.

How Are Corporations Individual Entities?

In the United States, a corporation may be defined as a legal entity that, according to state law, is able to engage in activity, as well as claim legal name as restricted by the corporate charter.

From a legal standpoint, corporations possess certain rights and responsibilities. They also carry the liabilities of other individual entities. For tax purposes, the IRS qualifies a domestic corporation as a "United States person." Similarly, foreign corporations are treated as "foreign persons."

Some companies are automatically considered corporations. Others must select the option as a tax classification.

Back in 1819, the U.S. Supreme Court held that a corporation possesses many of the same rights as individual citizens. Corporations can do the following:

  • Enter into contracts
  • Enforce contracts
  • File lawsuits
  • Be sued
  • Own assets
  • Pay taxes

A corporation's rights are constitutionally protected.

Individuals who wish to form a corporation must file formation documents with the state in which they want to incorporate. The documents are the Articles of Incorporation. When people form a corporation, they realize the following two major advantages:

  • They're able to issue stock through the corporation.
  • They're shielded from personal liability.

A person who wants to be part-owner of a corporation only has to buy some of the issued shares of stock.

If the corporation is legally liable for damages, reparations are limited to the corporation's assets. The corporate officers and shareholders are protected from legal action. The only way this protection is lifted is if they commit fraud.

What Is an Individual Entity in Legal Terms?

An individual entity typically refers to a business or legal structure where a single person is responsible for the operations and liabilities. The most common example is a sole proprietorship, where the business and the owner are legally the same. A single-member LLC can also qualify as an individual entity, offering liability protection while maintaining individual ownership.

In legal and financial contexts, the term may be used to distinguish between a natural person and a separate legal entity like a corporation or partnership. While corporations have "legal personhood," they are not individuals in the literal sense. In contrast, an individual entity is directly tied to a natural person, often making business decisions and assuming risk personally.

Corporations: Pros and Cons

A corporation is a separate, individual entity. It operates under state law, and its charter restricts its scope of activity and name. Corporations are legal entities. Shareholders own them and directors manage them. They're operated by officers.

As long as legal formalities are followed, corporate owners aren't personally responsible for business debts or liabilities. A corporation's shares of stock may be freely bought and sold. This is subject to applicable securities laws and regulations.

Several kinds of corporations exist, such as the following:

  • C corporations
  • S corporations
  • Professional corporations (P.C.)
  • Close corporations
  • Professional Associations (P.A.)

C corporations are subject to double taxation: the corporation itself is taxed on its profits, and the shareholders pay taxes on dividends.

Corporations have the following advantages:

  • Stockholders' limited liability: A stockholder's liability is limited to whatever he or she invested in the business. Creditors can't seize stockholders' personal assets to satisfy business debts unless there's a personal guarantee in place.
  • Perpetual life: Shares in the business can be passed on to heirs if a shareholder dies. Even when shareholders leave the business, it continues on as a legal entity.
  • Ease of transferring ownership: Stockholders are able to sell shares when they want, as long as there is a market.
  • Ease of expansion: There's a greater capacity to raise capital by selling stock.

Corporations have the following disadvantages:

  • Government regulation: The corporation must follow all state and recordkeeping regulations.
  • Higher cost: It costs more to form a corporation, compared to other business types.
  • State restrictions: A corporate charter restricts business operation to the state where it's issued unless owners get permission from other states.
  • Double taxation: This won't apply to corporations that elect S corp status, but it does apply to C corps.

Individual Entities vs. Business Entities

The distinction between an individual entity and a business entity is foundational in business law:

Individual Entity

  • Typically a sole proprietorship or single-member LLC
  • Owned and operated by one person
  • Simple tax filing—usually reported on the individual's personal tax return
  • Owner has full control but also bears full liability (unless it's a single-member LLC)

Business Entity (e.g., Corporation, Partnership)

  • Separate legal structure
  • Can have multiple owners or shareholders
  • Requires separate tax returns and regulatory compliance
  • Offers liability protection for owners or shareholders

Choosing between these depends on business goals, risk tolerance, and long-term vision. While individual entities offer simplicity, business entities provide scalability and protection.

Are Corporations Treated as People?

Corporations don't have all of the same rights as an individual person. For instance, they can't do the following:

  • Vote
  • Collect Social Security
  • Declare children as tax deductions

Corporate personhood has two main features: property ownership and contracts.

Corporations can own trademarks, land, buildings, and other types of private property. They're able to enter into legally binding contracts and into disputes as either a defendant or plaintiff.

Corporate officers and shareholders can't personally file suit if the corporation is wronged in some way. Likewise, no outside party can sue individual officers or stockholders for damage that the corporation commits.

In the technical sense, a corporation isn't an actual person, but legally, the business enjoys some individual rights. The personal liability protection that corporate owners enjoy is often a big factor in choosing this business structure.

Key Differences Between Individual and Entity Equity

One of the most important financial distinctions is between individual equity and entity equity:

  • Individual Equity refers to assets or ownership held personally. For instance, a freelancer using their own bank account and personally owning their tools has individual equity.
  • Entity Equity is tied to a business structure such as an LLC or corporation. Assets belong to the business, and any revenue is owned by the entity, not the individual.

Why it matters:

  • Legal protection: Entity equity can shield personal assets from legal claims against the business.
  • Investment readiness: Investors usually prefer entities with clear separation of personal and business finances.
  • Tax strategy: Businesses can utilize deductions and tax planning strategies unavailable to individual entities.

Frequently Asked Questions

  1. What is considered an individual entity?
    An individual entity typically refers to a person operating a business as a sole proprietor or through a single-member LLC.
  2. Is a single-member LLC an individual entity?
    Yes, a single-member LLC is considered an individual entity for tax and liability purposes, though it offers more protection than a sole proprietorship.
  3. Can an individual be a legal entity?
    Yes, in legal contexts, an individual acting in a business or contractual capacity can be referred to as a legal entity.
  4. What is the difference between an entity and an individual?
    An entity is a legally recognized organization such as a corporation or LLC, while an individual is a natural person. The primary difference lies in liability and asset separation.
  5. Is it better to operate as an individual or an entity?
    That depends on your business goals. Operating as an entity provides liability protection and scalability, while operating as an individual offers simplicity.

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