Within the 1024 system, the concept of an "identity" simply refers to any person/entity with whom your staff interacts, either in providing or receiving service. This broad definition of an identity means that you would include the following examples as 1024 identities:
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Individual clients
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External agencies who are clients/use your services for their clients
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Training organisations
You only need to create an identity record if you wish to record any details of the interactions between your organisation and the identity. You could, however, potentially record any external business as a 1024 identity - for example, your stationery supplier - since the system provides a readily available list of contact details.
To allow you to categorise types of identities, the system asks you to specify which identity types are applicable to each identity within the system.