What is a Legal Entity?
A legal entity is any organisation the law recognises as having rights, responsibilities, and obligations independent of the people who own or manage it. Put simply, it allows a business to exist in its own right, to sign contracts, hire employees, pay taxes, and be held accountable. Without this separation, every risk or debt of the company would fall directly on the individuals behind it.
For example, when you register a limited company in the UK, that company can hire employees, lease office space, and sign supplier contracts, all in the company's name. If something goes wrong, creditors pursue the company's assets, not your personal home or savings.
This legal recognition is what transforms an idea into a functioning business. When founders register a company, they create a legal entity that can operate in the marketplace, enter into agreements, and expand internationally. The entity becomes the structure through which employment, compliance, and growth occur.
Why legal entities exist
The main reason legal entities exist is to create a line between personal liability and business liability. If a limited company owes suppliers money, the company, not its directors, is legally responsible. This protection is one of the core incentives for entrepreneurs to incorporate.
Entities also provide governments with a way to regulate business activity. By requiring registration, annual filings, and tax compliance, authorities maintain oversight while giving companies the right to operate. Without such structures, international trade, investment, and employment would quickly become unworkable.
Types of legal entities
The exact forms vary between countries, but most jurisdictions recognise a familiar set of structures.
- Corporations and limited companies (Inc, Ltd, GmbH, SA): These are separate legal persons, owned by shareholders whose liability is limited to their investment.
- Limited liability companies (LLCs): Common in the US, an LLC combines liability protection with management flexibility.
- Partnerships: In general partnerships, owners share profits and debts. In limited partnerships or LLPs, liability can be restricted.
- Sole proprietorships or sole traders: The simplest structure, where the individual and the business are legally the same.
- Non-profits and NGOs: Formed for charitable, educational, or social purposes, often enjoying tax exemptions.
Each type balances liability, tax treatment, governance, and compliance differently. Choosing the right one depends on a company’s size, growth ambitions, and jurisdiction.
Global variations of legal entities
An important point about legal entities is that their shape depends heavily on where they are formed. The same business structure can look very different across borders:
- In the US, entrepreneurs may form C-Corps, S-Corps, or LLCs, each with distinct tax rules.
- In the UK, most small and medium firms operate as private limited companies (Ltds), while larger businesses may list as PLCs.
- In Germany, a GmbH (Gesellschaft mit beschränkter Haftung) is the most common corporate form, while an AG (Aktiengesellschaft) suits large, listed firms.
- In France, companies often choose between SARL, SAS, or SA, each with specific governance models.
These differences are more than labels. They affect tax rates, employee protections, how quickly a business can be dissolved, and even the credibility a company has when trading internationally.
Why legal entities matter in global employment
Expanding into another country is never just about finding great talent. It’s also about creating the right legal foundation. In almost every case, that foundation is a local legal entity. Without one, a company can’t run payroll, provide mandatory benefits, or stay compliant with tax and employment law.
But establishing a legal entity isn’t always straightforward. Incorporation can take months, demand upfront capital, and bring ongoing administrative costs. On top of that, there’s the permanent establishment risk, where tax authorities treat your overseas presence as fully taxable even if you don’t intend it.
The entity dilemma becomes acute when scaling internationally. For example, a UK company wanting to hire in Germany traditionally needs to establish a German GmbH. This requires €25,000 in share capital (with at least €12,500 paid upfront), around 1–2 months for registration, and several thousand euros in legal and notary fees, plus ongoing compliance costs.
That’s why many companies turn to an Employer of Record (EOR). An EOR employs workers on your behalf, acting as the legal entity of record in that country. It removes the need to incorporate, giving you speed and compliance without long-term commitments.
Key questions when considering legal entities
Before establishing entities internationally, consider:
- Headcount: Are you hiring 1-2 people or building a 20+ person team? The economics of entity formation typically make sense at scale, though the threshold varies by country and complexity.
- Permanence: How committed are you to this market long-term? This affects whether the investment in entity infrastructure is worthwhile, though commitment alone doesn't always mean you need an owned entity.
- Revenue: Are you generating local revenue that might create permanent establishment tax obligations? If you're already facing local tax liability, establishing an entity often makes more sense.
- Timeline: Do you need to hire in days/weeks or can you wait months for entity formation? Your hiring urgency will influence your initial approach.
- Complexity vs. control: Are you willing to manage ongoing compliance, accounting, tax filing, and corporate governance across multiple jurisdictions? The annual maintenance burden often exceeds initial setup costs.
- Strategic focus: Where do you actually need owned entities? Most companies benefit from establishing entities in their headquarters and major operational hubs, while finding alternatives for smaller teams in other markets.
The decision isn't one-size-fits-all. Some companies establish entities everywhere they operate. Others take a more selective approach, using owned entities strategically and partnering with an Employer of Record for locations where entity overhead doesn't justify the investment, whether that's for two years or twenty.
What this means for your business
A legal entity is the foundation of doing business. It creates the legal and financial structure that separates personal risk from corporate responsibility. The form you choose, and where you set it up, has major implications for liability, tax, and global growth.
For companies hiring internationally, legal entities are both a necessity and a barrier. The traditional approach is to incorporate locally. The faster alternative is to use an Employer of Record, which acts as the legal entity for you and keeps your global employment fully compliant
At Boundless, we own our infrastructure in every country we operate, which means we take responsibility for compliance and employee experience without shortcuts. If you’re planning to expand globally or are unsure whether you need to set up a legal entity, our team can help you choose the right approach.
Get in touch with us today to find out how we can remove the complexity, reduce your risk, and make global employment simple.
Frequently asked questions
What is a legal entity in simple terms?
A legal entity is a business structure that's legally separate from its owners. It can hire employees, sign contracts, and own property in its own name, providing liability protection for the people behind it.
Do I need a legal entity to hire employees internationally?
In most countries, yes. Labour law requires a legal employer that can handle payroll, provide mandatory benefits, and meet local compliance obligations. You can establish your own entity or use an Employer of Record that employs people on your behalf.
How long does it take to establish a legal entity internationally?
It varies dramatically by country. UK entities can be formed in 1-3 days, while a German GmbH typically takes 4-6 weeks. French entities usually take 2-4 weeks. If speed matters, an EOR service can employ people rapidly while you decide on long-term entity strategy.
What is a legal entity identifier (LEI)?
An LEI is a unique 20-character code used in global finance to identify entities in cross-border transactions.
What is Boundless?
Boundless is an Employer of Record. As an Employer of Record, we handle the most complicated parts of hiring talent abroad so you can focus on growing your team internationally. If you're looking to expand your team across borders but don't want to go through the trouble of setting up a legal entity, Boundless can help. Speak to an expert at Boundless to learn more.
