Imagine a situation where you are buying a car. The seller may be Mr Novák, but also the company AutoNovák s. r. o. In the first case you are dealing with a natural person, in the second with a legal entity. And it is in these moments that it is good to know who is who and what is the difference between a natural person and a legal person. Because to believe that “it doesn’t matter” would be a mistake.
In the simplest terms: a natural person is each and every one of us. From birth to death, we are natural persons. But that doesn’t mean that we can sign contracts or sell real estate right from birth. Legal capacity develops gradually.
The natural person is therefore you, your neighbour or the lady at the supermarket. A sole trader (self-employed) is also a natural person, but even though they are running a business, they are still a person, not a company in the legal sense.
Unlike a natural person, a legal person is not a flesh and blood human being, but a legally created entity that can act, enter into contracts, have assets and liabilities just like a human being. But unlike humans, a legal person must be created by a legal act, usually by registration in a public register.
Legal persons include:
So when you go to the cinema, for example, you are not dealing with Mr Novotný, but with a company called CineStar, s. r. o. This is a legal entity – it can let you go to the cinema, employ people, rent the auditoriums and pay taxes.
In order for a legal entity to function, someone has to run it. That’s why it has what’s called a statutory body. For example, in an LLC it’s the managing director, in an Inc. it’s the board of directors, in a school it’s the principal.
Are you going into business and not sure what legal form to choose? Do you need to check who you are dealing with? Contact us, we are ready to help you navigate the legal relations and choose the right legal form.
Whether you are running a business, buying property, entering into a contract or involved in litigation, it is important to know who is on the other side – the natural person or the legal person? Because who you deal with affects your rights, obligations and risks. While both may own property, appear in court or enter into contracts, there are a number of differences between them.
The fundamental difference begins with the very creation of these two types of persons. A natural person is created at birth. We have the legal capacity to enter into rights and obligations from birth, and to perform legal acts gradually, usually from the age of 18, as mentioned above. A natural person then ceases to exist on death , which also ends its legal existence.
A legal person, on the other hand, is an artificial legal construct that is created by registration in a public register – for example, a commercial or federal register. It can be established by a natural person, a group of persons or another legal entity. It ceases to exist by being removed from the register, but often only after liquidation (settlement of assets and liabilities) or merger (merger with another company).
So while a person can start a job or business without formal registration (e.g. a temporary job, a trade), a company cannot legally exist without formal formation, i.e. registration.
A natural person acts for himself/herself, therefore, signs contracts, concludes transactions, handles official matters personally or on the basis of a power of attorney.
A legal person as an intangible entity cannot act on its own. It must always be acted for by a specific natural person who has the authority to do so, typically a managing director in the case of a limited company, a board member in the case of an a.s., a principal in the case of a school, etc.
For example, if you rent an apartment from an individual, Mr. Novak, you sign the lease agreement with him. If the landlord is a real estate company, the contract is signed by the managing director or another authorised person, and the name of the company appears on the contract.
Identification is key when entering into contracts, filing lawsuits or keeping records. A natural person is identified by his or her first name, surname and sometimes even birth number (e.g. on an ID card). In addition, a natural person in business (self-employed person) uses an ID number and a VAT number, but still remains a natural person.
A legal person has a name (e.g. Books for Joy, Ltd.) and a compulsory personal identification number (PIN). For commercial companies, it is also usual to indicate the registered office and registration in the Commercial Register.
Therefore, an ID number does not automatically mean “company”. A natural person, such as a sole trader, may also have one.
One of the most important differences is the way in which debts and liabilities are guaranteed. A natural person, for example a self-employed person, is liable for his/her liabilities with all his/her assets, i.e. not only business assets but also personal assets (e.g. house, car, savings).
A legal person is liable only with the company’s assets. The partners of a limited company are not personally liable if they have paid their deposit. Exceptions exist, for example, in the case of taxes or criminal liability of the managing director for wilful misconduct.
How it works in practice: Jan Novák, a self-employed person, borrows money for his business but it doesn’t work out. Creditors can reach his personal account and his house. On the other hand, AutoNovák s.r.o. owes money, but its CEO is not personally liable unless willful damage or breach of duty is proven.
It is very easy foran individual to start a business, often it is enough to go to the trade licensing office, pay a few hundred crowns and the business is up and running. He can keep his accounts in a simplified form (tax records).
A legal entity is more complicated when starting up, it needs a notarial deed, drafting of founding documents, share capital (at least 1 CZK, but often more) and registration in the Commercial Register. On top of all this, there is the obligation to keep double-entry books and to fulfil a number of reporting and registration obligations.
How it works in practice. If she is a self-employed natural person, she only needs a few forms. However, if she sets up the company Jewelry Karolína Ltd., she will have to go through a notary, a court, an accountant and many other steps. On the other hand, she separates her personal assets from her business.
Tip: If you decide to set up a limited liability company, you must also take into account the need to contribute share capital. In our article you will find out what the ideal amount of share capital is.
It is not just a theory from a law textbook. The differences between natural and legal persons have an impact on everyday life, business, work and dispute resolution.
For example, you will encounter them when entering into contracts: if you enter into a contract with a natural person, you are dealing directly with a person. With a legal person, you need to check who is authorised to represent them. If you are self-employed, you are doing business as a natural person. When you set up an LLC, you become the owner and the managing director of the legal entity. Finally, these differences are also reflected in court proceedings: court disputes are handled differently because a legal entity must be properly represented, e.g. by a lawyer.
The choice between running a business as an individual or as a legal entity depends on many circumstances – from the size of the planned business to the level of risk appetite. A natural person, typically a sole trader, has an undeniable advantage in the ease and speed with which he or she can start a business. Setting up a trade is cheap, administratively easy and the business itself is very flexible, the entrepreneur can decide on changes without the need to call general meetings or act through proxies. On the other hand, there are disadvantages, the most important of which is the high personal risk. A natural person is liable for his/her liabilities with all his/her assets, i.e. not only business assets but also personal assets. In addition, they may have lower credibility with, for example, banks or larger business partners, who often prefer to work with companies.
On the other hand, a legal entity has a higher level of protection, in particular due to the separation of personal and corporate assets. The owner does not guarantee the company’s liabilities with his house or account, which reduces his personal risk. In addition, legal entities are often more reputable and have greater credibility in the market and with financial institutions. They are also better suited for larger projects, as they allow for the combination of multiple shareholders, a better division of responsibilities and brand development. However, they have the disadvantage of a higher administrative burden – legal entities have to keep double-entry books, file more reports and bear the costs associated with setting up, running and eventually dissolving a company.
Overall, therefore, a natural person is suitable for smaller, simpler businesses, while a legal entity is a better choice for those who want to grow, limit personal risks and operate professionally.
Tip: Why is business liability insurance worth it? Not only that, you can find out in our article.
A natural person is any person from birth to death – he acts for himself, can run a business as a self-employed person and is liable with all his assets, including his personal assets. A legal person, on the other hand, is not a person, but a legal construction represented by specific persons, e.g. managing directors. It is formed by registration in the public register and is liable only with its own assets, not with the assets of its founders. The difference between a natural person and a legal person is fundamental – it concerns the manner of formation, liability, identification and day-to-day conduct. While a natural person is recognised by its name and birth number, a legal person has a name, a registration number and statutory bodies. A natural person has the advantage of simplicity and low costs of incorporation, but carries greater risks. A legal person, on the other hand, is more trustworthy, less risky in terms of personal liability, but more demanding in terms of administration and management. Knowing the differences between these two types of persons is crucial not only for business but also for everyday life – from signing contracts to resolving legal disputes.
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Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.
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