Firm Definition: Characteristics, Types, and Steps to Establish a Firm

What is Firm? The word firma comes from the Dutch language, namely vennootschap onder firma or VOF which can be interpreted as a trade union between several companies.

In general, the firm itself is usually called a form of partnership between two or more companies to run a business using a common name. In the distribution of ownership, a firm is owned by several people or companies that are allied with the provisions that each member of the partnership surrenders personal assets according to what is stated in the deed of establishment of the company.

Definition of Firm According to Experts

1. Willem Molengraaff

According to Willem Molengraaff, a firm is an association, association or association established to run a company under one common name and where its members are not limited in their responsibility to the company’s engagement with third parties.

2. Wery

Meanwhile, Wery argues that a firm is a company operating under a joint name, but not as a limited liability company.

3. Slagters

Furthermore, Slagter revealed that the word is a cooperation agreement between two or more people with a common name to carry out the activities of a company, with the aim of obtaining benefits from shared property rights. This is done so that the company can achieve the objectives of the parties between them which require them to bind themselves by entering money, goods, good name, rights or a combination thereof into the association.

4. Indonesian Commercial Law Law

In accordance with the Commercial Law of the Republic of Indonesia, a firm is any company established with the aim of running a company under one common name.

In conclusion, a firm is a business entity established and run by two or more people (called Firmant) using a common name or one name used together to develop the company.

According to Article 16 and Article 18 of the Criminal Code of the Ministry of Finance, a Firma Company is each company (maatschap) that is established to run a company or business under one common name, where each member immediately gets full responsibility for all actions carried out by third party people.

Even so, the firm is not a legal entity. Conceptually, the firm does not recognize the term separation of assets between its members, each member is personally responsible for the overall and sustainability of the company. In addition, the reason why a firm cannot be said to be a legal entity is because the firm has met the material requirements but does not yet have the formal requirements in the form of ratification or recognition from the State in the form of legislation.

What is Theory of the Firm?

The Theory of the Firm or commonly called Firm Theory contains several economic theories that describe and imagine the nature of a company (company), from its structure, relationship with the market, behavior, to its existence.

The theory aims to answer the following questions:

1. Presence

Existence is important because it is the basis for why companies emerge.

The question that usually arises is: Why aren’t all transactions in the economy mediated in the market?

2. Limits

Boundaries become indispensable as to why the boundary between the market and the firm lies exactly there. It is closely related to the variety and size of the output.

The usual questions that arise are: Which transactions are negotiated in the market and which are carried out internally?

3. Organization

The existence of an organization can be a picture of a firma so that it can answer the question, why is the company structured the way it is, with a hierarchy, a central point, etc.?

4. Heterogeneity of Corporate Actions/Performance

Company performance serves to answer the question why companies do things, what drives them?

5. Evidence

Evidence is crucial because what tests are currently available for each theory?

A Scottish moral philosopher who pioneered the science of political economy, Adam Smith. Adam Smith is still known by many as the ‘father of modern economics’, in his monumental work – The Wealth of Nations. He emphasized that in the world of manufacturing, they can work more efficiently in production than workers or craftsmen when working alone.

Adam Smith revealed that a manufacturing company employs a more intense form of division of labor than can be arranged through market exchange. His perspective on the firm in terms of different types of division of labor was widely shared by classical economists.

Firm Features

Some of the characteristics that can be the characteristics of a firm business entity compared to other business entities. Understanding the characteristics and characteristics of a firm can provide knowledge about the various types of business entities in the business world. This insight can certainly be a provision if you want to set up companies and firms. Following are the characteristics of firms in Indonesia:

  • Firm members are generally familiar with each other and know each other so they trust each other.
  • Firm agreements can be made entrusted to a notary or privately.
  • Using the same name in business activities.
  • Has unlimited liability and risk of loss.
  • If there is an unpaid debt, then each owner is obliged to pay it off with personal assets.
  • Every member of the Firm has the responsibility and right to be a leader.
  • As a member of the Firm, you are not entitled to admit new members without the permission of other members.
  • Firm membership is valid for life.
  • Firm members have the right to dissolve the firm.
  • Increasing capital from business loans is easier.
  • Firm establishment does not need a deed of establishment.
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What are the Firm Types?

After understanding the meaning of a firm, the next is knowledge of the types of firms in Indonesia.

1. Trading Firm (Trading Partnership)

A trading firm is one of many types of firms engaged in trading. Trading activities that primarily focus on the buying and selling of products.

Examples of trading firms in Indonesia are: Nike, Diadora, Crocs, and so on.

a. Nike Firm Company

Nike company is well known in almost all parts of the world. Nike company comes from Uncle Sam’s country, United States of America. Nike does not only provide sports equipment such as clothing, Nike’s flagship product is shoes. Nike has become a brand for sports fans, the application of technology in each of its products makes people really like Nike products. As a result, it is very fast for Nike to develop and expand its market to various countries, one of which is also Indonesia.

Until now, the Nike company has quite a lot expanded its branches in Indonesia. This development is carried out from the start of the production process and its management. However, not only that, Nike continues to use standards for its implementation and management procedures according to Nike’s central company in the United States.

b. Diadora firm company

Firma Diadora has the activity of producing sporting goods. Various sports equipment produced for sports such as rugby, sports shoes, athletes, football, tennis, cycling, and so on. The Diadora company was founded by an Italian businessman named Marcello Danieli along with several other people.

c. Crocs Firm Company

Types of firm companies that are also engaged in the fashion sector in Indonesia, one of which is the Crocs firm which has fashion products with the types of shoes and sandals.

This proves that the Crocs firm is one of the many types of trading firms that have succeeded in producing goods that people need. Crocs produces rubber sandals and shoes to make various shapes and colors that attract the public.

2. Non-Trading Firms (Service Firms)

The opposite of a trading firm, a non-trade firm is engaged in services. The company’s main activities focus on selling a product by relying on certain expertise or commonly called services or services.

The following are examples along with explanations regarding non-trade firms in Indonesia, including law firms, accounting firms, management consulting, and many more.

a. Law Firm

As we often see, lawyers’ offices and legal consultants’ offices are usually called law firms. Law firms are included in the category of firms whose activities are non-trade because their activities are related to legal institutions.

The law firm is an example, one of many firms in Indonesia because it was founded and run by a group of people. Law firms exist from active and passive partners with the aim of providing legal services to the community.

b. Accounting Firm

Not only law firms, there are also accounting firms which are a type of non-trade firm in Indonesia. The formation of this accounting firm aims to provide accounting services outside the accounting institutions of a company.

This accounting firm is coordinated by a small group of people who aim to provide accounting services, both services needed by individuals, legal entities, and companies.

4. General Firm (General Partnership)

Different from trading and non trading firms. A public firm is a type of firm where each member has unlimited responsibilities or powers. This means that every member in a public firm must be fully responsible for the survival of the company.

If the company has a debt and is unable to pay it off, then each member of the public firm is obliged to pay the debt with his personal wealth.

5. Limited Partnership

Almost the same as a public firm, it’s just that a limited firm limits the powers of its members. If in a public firm the company members have unlimited power, in a limited firm each member holds a limited power.

Examples of limited firms in Indonesia include Sumber Rezeki Firm, Multi Marketing Firm, Indo Eternity Firm, and so on.

Firm advantages

  • The firm’s business entity management system has proven to be more professional due to clear coordination regarding the division of tasks for each organizational structure.
  • The initial capital to build a firm is relatively large because the source of funds comes from the cooperation of each member who is a member of the firm.
  • Leaders are selected based on their expertise, skills, abilities and skills, thereby minimizing the selection of leaders due to excess power. In addition, there are many firms that have more than one leader in their firm’s business entity.
  • Profit sharing is fair because it is based on the initial paid-up capital so that the system resembles investing in shares. The difference is, all members who provide capital in the firm have the active right to manage the running of the company.
  • The existence of a notarial deed can make it easier for firms to get capital loans if they really need a very large additional capital.
  • Firm decisions depart from the considerations and decisions of all members.
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Lack of Firm

  • When a company goes bankrupt, as a result the personal wealth and assets of the company owner can be confiscated as collateral to compensate for the company’s losses.
  • Firm members are not only responsible for capital. Members of the firm as owners of the company are also responsible for their personal wealth or property.
  • If one member of the firm suffers a loss, all members who are members of the firm are obliged to share in the loss. In short, the firm’s losses are shared by all company owners, including if it requires the use of personal wealth to cover losses.
  • The firm does not recognize the term separation between personal wealth and company assets.
  • Threats of dispute will usually arise if there is an unfair distribution of benefits.

Difference between Firm and Company

Registering your business as a company or firm is more important than developing the right product to be able to meet business needs and provide growth in the coming years.

In the business world, the terms company and firm are often used interchangeably, but conceptually they have different meanings, properties and characteristics. The most prominent differences between companies and firms are as follows:

1. Number of Members

The most important difference between a company and a firm is the number of members. Firms themselves must have a minimum of two people in the company and a maximum of 20 people required to register a firm. Meanwhile, a company only has a maximum number of people or employees when it registers itself.

2. Accountability

Another difference between a company and a firm is responsibility. Each member of the firm has unlimited liability and may be personally liable for the company and its personal assets. As a result, if the company fails to pay debts, the company members are obliged to pay off debts from the firm. This is one of the main weaknesses of the firm, but all can be overcome if based on fairness and professionalism.

Unlike a corporation, in a business entity in the form of a company, founders or partners only have limited liability. That means they are limited to shares due to their investment in the company, but have no personal obligation to the debtor’s affairs. In short, they have no responsibility if the company goes bankrupt or is corrupt.

3. Share Ownership

A registered company is a shareholder in the company, it does not include company employees. In contrast, the firm is owned by many members in partnership. It can distinguish between stakeholders and shareholders who may differ slightly

In a membership firm, members who have a lower number of individuals, partners have greater power to influence decision making in the company when compared to company operations.

4. Annual and Financial Reports

Business actors who have registered as a public limited company are required to follow the public company policy and are required to disclose results and issue an annual report to investors and public shareholders.

Meanwhile, business entities that are registered as firms have no obligation to report their financial information to external parties or third parties and they are not required to publish any reports or maintain their business in discretion.

Firm Establishment Procedure

The procedure for setting up a firm with a group, then what you need to do is understand the process of establishing a firm properly and carefully. The regulations and procedures regarding firm business entities are already listed in article 22 of the Criminal Code. Article 22 of the Criminal Code explains that the establishment of a firm must be based on an authentic deed without the possibility of being denied by a third party.

In accordance with articles 23 and 28 of the Criminal Code, it is also explained that the deed must be registered at the Registrar’s Office of the District Court. This means that the deed is made and then the deed is mandatory to be announced in the News of the Republic of Indonesia.

The deed can contain everything about the firm such as the business agreement, the type of business, when the business was founded, and when the business will end. As a result, establishing a firm business entity is closely related to the legal court process for registering firm deed. If you set up a firm but do not have an authentic deed from the court, then your firm is deemed to have run various businesses and for an unlimited period of time.

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Referring to the previous understanding of the firm, a business entity can be said to be not a legal entity if the company has met the material requirements and does not meet the formal qualifications. The firm business entity has the obligation to register a NPWP which is separate from the obligations of its owner members, in this case including taxpayers.