When you organize a company, the language may be English, but the jargon sounds “foreign” like you are playing a card from Dungeons and Dragons for an invincibility cloak. Wading through the lingo, one particular term you may encounter is “juridical entity.” While “juridical” simply means “legal”, knowing the characteristics of a juridical entity is helpful to know. Juridical entities are created by each state’s law to give a basket of rights normally associated with humans to non-human business entities. The law also gives rights that are often associated with property to the business entities, such as alienable ownership (the ability to sell/transfer ownership in the company). Here’s what you need to know.
First, What Is an Entity?
To understand what a juridical entity is, it’s first important to grasp the concept of an artificial entity. An incorporation is started with a filing in the state jurisdiction that will govern its internal affairs. No matter where it is used, it retains that state of incorporation as its governing jurisdiction for determining the rights of its owners and managers. It has a distinct and independent existence from its owners, thereby offering limited liability. An entity is not like your iPhone that has certain functions, because an entity is more autonomous and can even live forever. It may act only at the direction of its owners and managers, but the law treats it like it has its own soul for certain legal purposes. This entity has its own purpose, accounting, legal existence, and is considered separate by law from its owners.
A juridical entity can have its own credit, enter into contracts, file for bankruptcy, and can sue or be sued by third parties. But the separation granted by an entity status helps distinguish the debts and assets of the entity from those of its owners. It has its own name and can own property. How separate the entity is from its owners is determined by how good the state law where the company is formed. If the state code and court cases are like the manufacturer of a product, you have the opportunity to shop for the best manufacturer. Delaware is known as having laws that best protect owners from the liabilities of the company. Delaware courts are known for its independent jurisprudence in providing educated well-informed legal decisions.
Many other states have exceptions that allow owners to be held to account for the debts of the company. Other state legislatures do not defer to the corporate bar to draft the corporate laws, like Delaware does. Other states’ courts have elected judges that rarely leads to the most competent and independent judiciary. Therefore it is important to be careful when deciding the state jurisdiction that will govern your business entity’s internal affairs.
What Is a Juridical Entity, Exactly?
A juridical entity, also known as a juridical person, is a non-human legal entity. Meaning, it’s an organization that is not a natural person (i.e. a human being). By law, a juridical entity has its own duties and rights, and is recognized as a legal person, a designation that is different from a natural person.
Out of thin air, in the land of make believe, state legislatures allow people to conjure up these magical creatures with little more than the submission of one piece of paper to a state filing office. States give this magical power to everyday people to become protected entrepreneurs who form juridical entities because having the protections of a separate entity encourages commerce, investment, jobs, technological improvement and economic prosperity. The rights of a juridical entity are considered separate from the natural persons who own it.
An entity that is not a juridical entity is a sole-proprietorship because there is no separateness from its owners. Similarly, a general partnership is often not considered a juridical entity because it simply is a way to hold a group of people jointly liable and setup joint ownership. A division of a corporation is not a juridical entity because while it may be a part of a corporation, it does not have a separate legal existence outside of other assets of that corporation. Even in a Series LLC, the protected series have characteristics of juridical entities, such as separate asset protection and are even “persons” but they are not juridical entities because only the Series LLC itself is a juridical entity.
Often companies form subsidiaries because the company wants that separate juridical entity existence to group assets and prevent cross liability between those assets had those assets simply been designated as divisions of the parent holding company.
Incorporation Alone Won’t Make Your Business a Juridical Entity
Keep in mind that incorporating alone won’t make you a juridical entity. In order to be “duly” incorporated juridical entity by law, it’s important to do have necessary internal company documents. For example a corporation needs to have bylaws, minutes, and a stock ledger. LLCs need to have an operating agreement, a written, private document among members that sets forth the ownership, management structure, and operating procedures for an LLC.
It’s also crucial to keep records for your juridical entity that are separate from your personal records. That means bank accounts, billing records, and taxes should be conducted separately.
Being a juridical entity in the true sense of the word can help protect your personal and business assets. It’s an important distinction to have, and a powerful tool in protecting you and your business.