Apr 16, 2019
2 min read

Who Hides Behind the Legal Entity Status

A legal entity is an individual, company, association, trust, partnership, proprietorship, corporation, or organization that is recognized as having certain legal rights and obligations with the legal capacity to sue and be sued in its own right, be accountable for illegal activities, enter into agreements or contracts, assume obligations, incur and pay debts.

Businesses vary in their number of owners, the liability of these owners, taxation, transferability costs, and other factors. To put it simply, there are three main types of legal entities that can be conducting business:

Sole proprietorship

A business that has only one owner who fully controls and is responsible for everything within it, including all of the debts and liabilities.


Involves two or more owners and divides into several types of partnerships:

  • General partnership, where partners have equal management rights. General partnership can’t be transferred;
  • Limited partnership (Ltd.), where partners are passive investors liable for any other party’s debts only to the extent of their input. Limited partners can be replaced and ownership interests transferred to others;
  • Joint venture, where the partnership is limited to a certain project.
  • Limited liability partnership (L.L.P.), where partners are professionals (ex. lawyers or accountants) only responsible for themselves with no liabilities for each other. Partners can change without affecting the business at all.


A business owned by multiple shareholders with limited liability and transferable shares. A corporation functions with operating officers and managing directors.

Most emerging companies and startups use one of these business models. There are a number of other legal entities not mentioned above, such as foundations, associations, trusts, and non-profit corporations, etc.

A part of working with legal entities is making sure that you will not get in trouble because of them, hence businesses integrate ongoing regulatory compliance to be on guard for any inconsistencies with legal requirements.

Keeping up with the complex, ever-changing reporting requirements, businesses get dozens of requests in a single day to process. Therefore, it is more common now to incorporate an automated KYC/AML system, that is quick to filter out illegible legal entities screening them against multiple databases, maintaining the corporate records of all transactions, reports, and audits.

With access to multiple international and local sources, a KYC solution checks legal entities’ business names and foreign authorizations, special licenses and permits, and documents for maintaining tax status.

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