Entity is defined as “an organization that has a legal identity apart from its members.”
An entity is what most people think of when they think of a business. Because it has an identity of its own, an entity can do most of the things a person can do. An entity can:
- make agreements and sign contracts
- be in partnership with another entity or an individual
- lend and borrow money
- own, sell, lease, and mortgage property
- sue and be sued
In the eyes of the law, an entity is a person.
Forming an entity for your business gives your idea an identity separate from the founders. Because it has its own identity, entities will take on a life of their own and begin to grow. You can nurture and invest in your business, but eventually your business will stand on its own.
It is presumed that a business has an identity separate from its owners. It is important, however, to make sure an entity is completely separated from the owners. To do this, owners must keep their assets separate from the assets of the entity. The entity should have its own bank account. Personal expenses should be paid by the owners themselves and not the entity. Business expenses should be paid by the entity (or the owners should be properly reimbursed). Entities offer many protections to the owners, but an entity must be treated as separate from those members to make sure those protections hold up when they matter most. If the owners fail to treat an entity as having a separate identity, it is possible that the entity may not be treated as separate by courts and creditors.