Determine your cloud identity model


Microsoft 365 uses Microsoft Entra ID to manage identities and authentication for Microsoft 365. Microsoft Entra ID is a cloud-based user identity and authentication service that's included with your Microsoft 365 subscription. Getting your identity infrastructure configured correctly is vital to managing Microsoft 365 user access and permissions for your organization.

To plan for user accounts, you must first understand the two identity models used in Microsoft 365:

  • Cloud-only identity. An organization maintains its identities in the Microsoft Entra tenant for your Microsoft 365 subscription. No identities are maintained on-premises.
  • Hybrid identity. An organization maintains its identities in its on-premises Active Directory Domain Services (AD DS) and uses them for authentication when users access Microsoft 365 cloud services.

The following table outlines the two types of identity and their best fit and benefits.


Cloud-only identity

Hybrid identity


User account only exists in the Microsoft Entra tenant for your Microsoft 365 subscription.

User account exists in AD DS and a copy is also in the Microsoft Entra tenant for your Microsoft 365 subscription. The user account in Microsoft Entra ID may also include a hashed version of the already hashed AD DS user account password.

How Microsoft 365 authenticates user credentials

The Microsoft Entra tenant for your Microsoft 365 subscription performs the authentication with the cloud identity account.

The Microsoft Entra tenant for your Microsoft 365 subscription either handles the authentication process or redirects the user to another identity provider.

Best for

Organizations that don't have or need an on-premises AD DS.

Organizations using AD DS or another identity provider.

Greatest benefit

Simple to use. No extra directory tools or servers required.

Users can use the same credentials when accessing on-premises or cloud-based resources.

The following sections examine each identity model in greater detail.

Cloud-only identity

A cloud-only identity uses user accounts that exist only in Microsoft Entra ID. Cloud-only identity is typically used by small organizations that don't have on-premises servers or don't use AD DS to manage local identities.

In the cloud-only model, both on-premises and remote (online) users use their Microsoft Entra user accounts and passwords to access Microsoft 365 cloud services. Microsoft Entra authenticates user credentials based on its stored user accounts and passwords.

Because user accounts are only stored in Microsoft Entra ID, you manage cloud identities with tools such as the Microsoft 365 admin center and Windows PowerShell.

Hybrid identity

Hybrid identity uses accounts that originate in an on-premises AD DS and have a copy in the Microsoft Entra tenant of a Microsoft 365 subscription. Most changes, except for specific account attributes, only flow one way. Changes that you make to AD DS user accounts are synchronized to their copy in Microsoft Entra ID.

Microsoft 365's directory synchronization tools, Microsoft Entra Connect Sync and Microsoft Entra Connect cloud sync (which are covered in a later unit), provide ongoing account synchronization. You must select the tool that best fits your business requirements. They check for changes in the AD DS and forward those changes to Microsoft Entra ID. They can also filter which accounts are synchronized and determine whether to synchronize a hashed version of user passwords, known as password hash synchronization (PHS).

When you implement hybrid identity, your on-premises AD DS is the authoritative source for account information. This design means that you perform administration tasks mostly on-premises, which are then synchronized to Microsoft Entra ID. The Microsoft Entra tenant has a copy of the AD DS accounts. In this configuration, both on-premises and remote users accessing Microsoft 365 cloud services authenticate against Microsoft Entra ID.


In the hybrid model, you must choose one of the two directory synchronization tools to synchronize user accounts for hybrid identity (these tools are examined in greater detail in a later unit in this module). You need the synchronized user accounts in Microsoft Entra ID to perform license assignment and group management, configure permissions, and other administrative tasks that involve user accounts.

Depending on your business needs and technical requirements, the hybrid identity model is the most common choice for enterprise customers who are adopting Microsoft 365. Directory synchronization allows you to manage identities in your Active Directory Domain Services (AD DS), and all updates to user accounts, groups, and contacts are synchronized to the Microsoft Entra tenant of your Microsoft 365 subscription.

Knowledge check

Choose the best response for the following question. Then select “Check your answers.”

Check your knowledge


Contoso employs a hybrid identity model. Microsoft Entra authenticates Contoso's remote users who access Microsoft 365 cloud services. Which of the following services authenticates Contoso's on-premises users who access Microsoft 365 cloud services?