Legal entity

A legal entity is defined as a individual, group of persons, business or non-business construct that has legal rights and obligations in connection with agreements, contracts, payment and settlement, penal action, etc. A legal entity is established as per law requirements and has its own legal personality. It can enter into contracts, buy and sell, lease and take on lease, invest and deploy economic resources and take part in legal action, etc.

Legal entity usually denotes a limited company of certain type or, sometimes, a limited partnership that is set up to fulfill narrowly defined, specific, or temporary objectives (such as a special purpose vehicle, SPV).

A corporation, alternatively known as a C corp, is a legal entity that is operationally and financially independent from its owners. Corporations can do business and generate profits, and can be held legally liable for its actions.

Virtual entity

On the other hand, a virtual entity refers to a hypothetical entity that has no legal identity different from that of its parent entity. A virtual entity consists of a distinct set of assets/ liabilities related to a certain group of stakeholders (e.g., investors in a pool). This set has its own accounting, including what relates to revenues, losses, gains, etc.

The rights and obligations related to a pool or a category of stakeholders are isolated and segregated for from those of others’ (whether a corporate entity, i.e., the establishing parent entity, or other stakeholders) for certain purposes such as accounting and financial reporting. A virtual entity does not exist by its own, but rather in the books of account and accounting system for its own financial reporting and calculation of profits and losses, and consideration of other aspects (e.g., provisioning, attribution, etc.)

Determining factors

An entity could operate either type or both types of these structures (legal entity and virtual entity) depending on certain factors including purpose, scope, risk considerations, and desired relationship with other stakeholders.