Understanding Legal Entities, Companies, and Organizational Hierarchies in Dynamics 365 Finance and Operations
If you’re just starting with Dynamics 365 Finance and Operations (Dynamics 365 Finance & Operations) and confused about what Legal Entities, Companies, and Organizational Hierarchies mean, you’re not alone! Let’s break it down in simple terms.
What is a Legal Entity?
In Dynamics 365, a Legal Entity is an organization that can:
- Enter into legal contracts,
- Own assets,
- Incur liabilities,
- Be legally responsible for its actions.
Think of a Legal Entity as a registered company or business under the law.
Microsoft Docs Reference:
What is a Company in Dynamics 365 Finance & Operations?
Each Legal Entity is also referred to as a Company in the system.
In the interface, you switch between Companies (Legal Entities) using a 4-character company ID (like USMF or INMF).
Tip:
Even if you manage multiple companies (e.g., one in India, one in the US), D365 can consolidate and report across them — provided they are set up as separate legal entities.
What are Organizational Hierarchies?
This is where the real power lies! Organizational Hierarchies define how different parts of your business interact and report to one another.
You can set up hierarchies for:
- Financial reporting
- Procurement
- Sales and marketing
- Security roles
Example: A retail chain may have a parent legal entity, and underneath, different divisions like wholesale, online store, and physical stores — all structured in a hierarchy.
Microsoft Docs Reference:
Real-World Example
Let’s say you’re working for a construction company that operates in three countries:
- India (INCO)
- UAE (UACO)
- USA (USCO)
You’d set up each country as a Legal Entity (Company). Now, you want:
- Shared procurement functions across India and UAE
- Financial reporting consolidated for global leadership
Organizational Hierarchies let you define that.
What Can Be Shared Across Legal Entities?
Microsoft allows some data to be shared across companies:
- Number sequences
- Chart of accounts (via shared account structures)
- Products (via Product Information Management)
- Vendors and customers (with Global Address Book)
To conclude, if you’re evaluating Dynamics 365 Finance and Operations and wondering how to structure your organization within the system, we’d love to help you design it the right way.
Whether you’re a startup expanding internationally or an enterprise optimizing operations, your legal entity and organizational structure are the foundation of your Dynamics365 system.
Let’s build that foundation together. You can reach out to us at transform@cloudfonts.com.
