Entity definition
/What is an Entity?
An entity is something that maintains a separate and distinct existence. In business, an entity is an organizational structure that has its own goals, processes, and records. An entity is treated as a separate "person" in the eyes of the law, meaning it can own assets, incur liabilities, enter into contracts, and be held accountable independently of its owners. In accounting, maintaining the entity concept ensures that the business’s financial records are kept separate from those of its owners or other businesses. This separation is essential for accurate financial reporting, legal protection, and decision-making.
Example of Entities
There are several types of business entities, which include the following:
Sole proprietorship. A sole proprietorship is the simplest and most common type of business entity, owned and operated by one individual. It is not legally separate from the owner, meaning the owner assumes full liability for the business’s debts and obligations.
Partnership. A partnership involves two or more individuals or entities sharing ownership, profits, and responsibilities. There are different forms—general partnerships, where all partners share liability, and limited partnerships (LPs) or limited liability partnerships (LLPs), which offer limited liability to some partners.
Limited liability company (LLC). An LLC is a flexible hybrid entity that combines the liability protection of a corporation with the tax benefits and operational simplicity of a partnership. Owners (called members) are generally not personally liable for the business’s debts.
Corporation (C Corporation). A C corporation is a separate legal entity owned by shareholders, offering strong liability protection. It is subject to corporate income tax, and shareholders may also be taxed on dividends (double taxation).
S corporation. An S corporation is similar to a C corporation but allows profits and losses to pass through to shareholders' personal tax returns, avoiding double taxation. It has restrictions on the number and type of shareholders and is limited to U.S. citizens or residents.
Cooperative. A cooperative is a business owned and operated for the benefit of its members, who use its services or buy its products. Profits are distributed among members based on their participation rather than ownership stake.
Nonprofit organization. A nonprofit is formed to serve a public or charitable purpose and is exempt from paying income taxes. Any surplus revenue is reinvested into the organization’s mission rather than distributed to owners or shareholders.
Characteristics of an Entity
These entities all have names that may differ from the names of their owners. The entities may independently own assets and incur obligations, though some entity structures (such as the sole proprietorship and some forms of partnership) may allow owners to also be liable for the obligations of their business entities. An entity may also be required to submit tax returns and pay governments for their income earned.
Accounting for an Entity
In accounting, transactions are recorded and financial statements are produced for a specific entity. There is not supposed to be any intermingling between the affairs of investors and the business conducted by an entity that they own. If a parent entity owns another entity, then the parent may release consolidated financial statements for the combined entity.