Term
Legal entity
A subject of law that is not a human being but to which the law grants its own rights and obligations, such as a company, a cooperative, a foundation or a civic association. It acts through its bodies and is liable for its debts with its own assets.
Updated
What it means
A legal entity is a subject of law that is not a human being but to which the law grants its own rights and obligations. Examples include commercial companies such as an s. r. o. or joint-stock company, cooperatives, foundations, civic associations, non-profit organisations, and the state and municipalities.
A legal entity has legal personality separate from its members or founders. It owns assets, enters into contracts, employs people, pays taxes and is liable for its obligations with its own assets. It acts through bodies defined by law and its articles.
For business, the s. r. o. is the most common choice, since it combines members' limited liability with relatively simple administration. Non-profit purposes are served by civic associations, foundations and non-profit organisations, which may not distribute profit among their members.
How it works in practice
A legal entity acts through its statutory body: the managing director in an s. r. o., the board in a joint-stock company, the body named in the statutes of a civic association. Others can act under a power of attorney or procuration. Who may sign is checked in the relevant register.
Legal entities have their own accounting and tax duties. Commercial companies keep double-entry books, file corporate income tax returns and lodge financial statements with the register. Non-profit organisations follow special rules but must still keep accounts and file reports.
Most legal entities must record their beneficial owners in the register. It shows who really owns or controls the entity and serves to prevent money laundering and to help verify business partners.
What to watch out for
Limited liability does not mean officers are untouchable. A director is liable for damage caused by breach of duty, for filing for bankruptcy on time and in some cases for tax debts. Holding office in a legal entity carries personal risk.
A dormant legal entity still has obligations: tax returns, financial statements and up-to-date register entries. Neglect brings fines and sometimes a listing among high-risk entities, so a company that is no longer needed is best wound up properly.
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