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Firms: Definition, Types, and Establishment Requirements

When establishing a company, you may select from various business organizations depending on your specific requirements, including partnerships, limited liability companies (LLC), and firms. Choosing the appropriate business entity will undoubtedly have a significant impact on your company’s financial viability in the future. A company is one of the most prevalent and often encountered commercial organizations. 

A firm is a kind of business organization that allows two or more individuals to operate a company together under the guise of a joint venture. Members shall contribute personal assets in line with the terms of the company’s incorporation document. Each member of the firm’s corporate entity is fully accountable for the company’s future success. In addition to the definition of the firm’s business entity, the features, requirements, and kinds of the firm’s business entities and their benefits and drawbacks will addressed.

Read more: Company Organizational Structure: Key Success Factor

Requirements for Establishing a Firms

Source: wallsheaven.com

If you want to start a firm, there are various criteria that you must do depending on the legal foundation for doing so. These criteria include the following:

1. Have a minimum of two members

The primary prerequisite for establishing this corporate organization is the presence of at least two founders. Suppose you want to show a business entity with just one person. In that case, it is more prudent to establish a trading company.

2. Have a business name that will be registered as a firm

A single individual cannot choose the name of a business organization registered as a corporation in a corporation. As a result, there must be a consensus among numerous members of the fellowship. If necessary, have talks and reach an amicable agreement on the appropriate company name.

3. Have a board of directors and members who are actively involved

Importantly, firm management must have their divisions, tasks, and obligations when it comes to operating the business. This is to ensure that the corporate entity’s operational operations and management operate more efficiently and effectively.

4. Possess a clear objective and specific efforts

Have a defined goal, and particular efforts are presently creating the business. Of course, you must consider the company’s purpose. Without a sense, a business cannot function or grow.

5. The company’s domicile has been established

Before establishing a business, the location of the company’s domicile or principal place of business must founded because the domicile will become the address of the firm’s area of business, which include in the firm’s deed of incorporation later.

Characteristics of Firms

We may learn more about them by analyzing their characteristics. The following criteria show that the business entity is in the form of a firm:

  • firstly, a firm is a for-profit enterprise often established as a partnership. It offers professional services such as legal or accountancy.
  • Secondly, the firm theory postulates that businesses exist to maximize profits.
  • Thirdly, to be distinct from a firm, a company is a commercial enterprise that sells products or services for profit and encompasses all business structures and trades.
  • Lastly, A company firm may have one or more locations owned by the same entity and report to the same EIN.

Types of Firms

While a company’s commercial operations are usually performed under the firm’s name, the degree of legal protection provided to workers and owners varies according to the ownership structure used to establish the organization. Certain types of organizations, such as corporations, provide more legal protection than others. There is a well-established notion of the mature company. Firms may classified in a variety of ways depending on their ownership structures:

1. Sole proprietorship or sole trader

This type of firm controlled by a single individual responsible for all expenses and responsibilities and owns all assets. Although it is uncommon for single proprietorship companies to function as firms, it does occur.

2. Corporation

The financial statements of the companies are kept separate from those of the proprietors. The company owners are not responsible for the business’s expenses, litigation, or other responsibilities. Individuals or governments may own corporations. Corporations, commercial entities, may act similarly to people. They may take out loans, engage in contract agreements, and pay taxes, among other things. A company is often used to refer to a business that several individuals own.

3. Partnership

This type of firm is a partnership owned by two or more individuals; the number of partners is unlimited. Each partner is personally responsible for all company responsibilities, and collectively they control the firm’s assets.

4. Financial cooperative

This type of firm is comparable to a corporation in that its owners have limited liability. Still, investors have a voice in how the business operates.

Advantages of Firms

As with other types of commercial organizations, establishing a company offers several benefits and drawbacks. The following are some of the help:

  1. The process for forming a company corporation is usually straightforward.
  2. The starting capital is substantial since it derived from the combined contributions of all members who are also members of the company.
  3. Profit-sharing based on paid-up capital, simulating a stock investment. The distinction is that each member who invests in the business has the right to participate actively in its management.
  4. Effective administration of corporate entities enhanced by the distinct distribution of responsibilities within each organizational level.
  5. Due to the notarial deed, it is simple to acquire big capital loans.

Disadvantages of Firms

  1. Each member of a business entity is personally liable for the obligations of the business.
  2. No distinction made between ownership rights and corporate assets.
  3. Conflict is more likely to occur since more than one individual manages it.
  4. If your company declares bankruptcy, your wealth may seized to compensate for the business’s losses.
  5. If one of the firm’s members suffers a loss or involved in legal problems, the other members must pay the cost.


A firm is a commercial entity made up of many individuals. While each member’s power is limitless, there is no less risk. To do so, you must better understand why you want to create a specific company or business entity.

Any company need to make accurate financial records. As a result, your business’s operations will become more productive and efficient. If your business often has difficulties creating financial reports manually, you may rely on Hashmicro’s Accounting System. You can increase your business profitability with the help of automated, accurate budget calculations.

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Vania Marsha Kristiani
A Junior Content Writer at HashMicro who Interested in Digital and Growth. Also a life-time learner who always strive to learn and grow. For business inquiries: [email protected]


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