Define: Entity Assumption

An entity assumption refers to the legal principle that treats a corporation or other business entity as a separate legal entity from its owners or shareholders. This means that the entity has its own rights, liabilities, and obligations, distinct from those of its owners.

The entity assumption is important because it allows businesses to operate as separate legal entities, providing protection to the owners’ personal assets. It also enables businesses to enter into contracts, sue or be sued, and engage in other legal activities in their own name.

The entity assumption is established by registering a business entity with the appropriate government authority, such as the Secretary of State’s office. This typically involves filing the necessary formation documents, such as articles of incorporation or articles of organisation, and paying the required fees.

In certain circumstances, the entity assumption can be disregarded, which is known as “piercing the corporate veil.” This occurs when a court determines that the owners or shareholders have not treated the entity as a separate legal entity and have used it to engage in fraudulent or illegal activities. In such cases, the court may hold the owners personally liable for the entity’s obligations.

The entity assumption offers several advantages, including limited liability protection for the owners, the ability to raise capital through the issuance of shares or membership interests, and the potential for perpetual existence even if the owners change.

Yes, there are limitations to the entity assumption. For example, owners cannot use the entity to commit fraud or engage in illegal activities. Additionally, certain legal obligations, such as paying taxes and complying with regulatory requirements, still apply to the entity and its owners.

Generally, an individual owner or shareholder is not personally liable for the debts and obligations of the entity. However, there are exceptions to this rule, such as when the owner provides a personal guarantee for a loan or when the entity’s debts are not properly separated from the owner’s personal affairs.

Yes, the entity assumption can be applied to various types of business entities, including corporations, limited liability companies (LLCs), partnerships, and limited partnerships. Each type of entity has its own specific requirements and characteristics, but they all benefit from the entity assumption principle.

In most cases, the entity assumption cannot be changed or revoked once a business entity is properly formed and registered. However, the owners may choose to dissolve the entity or convert it into a different type of entity, which would require following the legal procedures for such changes.

To maintain the entity assumption, it is important to observe proper corporate formalities, such as holding regular meetings, keeping accurate records, and maintaining separate bank accounts for the entity. Additionally, owners should avoid commingling personal and business assets and should always act in the best interest of the entity.