One of the most important decisions made by a person beginning a business is choosing a FORM OF BUSINESS. This decision is important because the business owner’s liability and control of the business vary greatly among the many forms of business. In addition, some business forms offer significant tax advantages to their owners.
Although other forms of business exist, usually a person starting a business will wish to organize the business as a: (Jane P. Mallor dkk, ~Business Law and the Regulatory Environtment, Introduction to Froms of Business and Formation of Partnership, page 744 – 750 )
- Sole Proprietorship;
- General Partnership;
- Limited Partnership;
- Limited Liability Partnership;
- Limited Liability Company.
Let’s we learn what is the differences between them!
- SOLE PROPRIETORSHIP
Definition: a type of business unit where one person is solely responsible for providing the capital and bearing the risk of enterprise and for the management of the business (J.L. Hanson). Features of Sole Proprietorship such as: Single ownersip; No separation of ownership & management; Less legal formalities; No separate entity from the owner; No sharing of profit and loss; Unlimited liability; and One man control.
Merits of Sole Proprietorship such as: Easy to form and wind up; Quick decision and prompt action; Direct motivation; Flexibility in operations; Maintenance of business secret; and Personal touch.
Demerits of Sole Proprietorship such as: Limited resources; Lack of continuity; Unlimited liability; Not suitable for large scale business; and Not posiblee to hired expert.
So, The sole proprietorship is suitable where the market is limited, localised; the customers give importance to personal attention; the capital requirement is small; the risk involved is limited; and suitable for the production of goods and services which involve manual skill e.g.: handicrafts, jewellery, haircutting etc.
Conclusion is a Sole Proprietorship has only one owner. The sole proprietorship is merely an extension of its only owner, the sole proprietor. As the only owner, the sole proprietor has the right to make all the management decisions of the business. In addition, all the profits of the business are his. A sole proprietor assumes great liability:he is personally liable for all the obligations of business. Hence, the sole proprietorship is a risky form of business, for its owner.
The example of Sole Proprietorship is person has phone shop at mall, person sell food on the street etc.
A partnership has two or more owners, called PARTNERS. The partners have the right to make all the management decisions for the business. In addition, all the profits of the business are shared by the partners; The partners assume personal liability for all the obligations of the business. All of debts of the business are the debts of all the partners. Likewise, partners are liable for the torts committed in the course of business by their partners or by partnership employees. If the assets of the business are insufficient to pay the claims of its creditors, the creditors may require one or more of the partners to pay the claims using their individual, nonbusiness assets. Thus, a partner may have to pay more than his share of partnership liabilities.
There are 3 form of PARTNERSHIP: GENERAL PARTNERSHIP, LIMITED PARTNERSHIP and LIMITED LIABILITY PARTNERSHIP.
a. GENERAL PARTNERSHIP.
In a general partnership, all partners have unlimited liability of the firm.General partners have rights and liablities similar to partners in a partnership. They manage the business of the limited partnership and have unlimited liability.
In Indonesia, general partnership called as FIRMA. The example of Firma:
b. LIMITED PARTNERSHIP
In a limited partnership, one or more partners have unlimited liability and one or more partners have limited liability for the debts of the firm.
Those with UNLIMITED LIABILITY are GENERAL PARTNERS. Those with LIMITED LIABILITY are LIMITED PARTNERS. Limited partners are responsible for the debts of the partnership up to the limit of their investment in the firm.
General partners have rights and liablities similar to partners in a partnership. They manage the business of the limited partnership and have unlimited liability for the obligations of the limited partnership. Once they paid their capital contributions to the limited partnership. Limited partnership have no right to manage the business ad may lose their limited liablity for the business obligations if they do manage the business. Limited partners usually have no liabiliy for the obligations of the limited partnership
The words “Limited Partnership,”or “Ltd.,”or “LP”identify this type of organization. For the privilege of limited liability, the limited partner usually accepts less compensation than a general partner and exercises less influence in the affairs of the firm. If the limited partners get involved in management, they risk their liability protection.
The example of LIMITED LIABILITY PARTNERSHIP:
In Indonesia, LIMITED PARTNERSHIP called as CV (COMMANDITAIRE VENNOTSCHAFT).The example of CV:
3. LIMITED LIABILITY PARTNERSHIP
Reacting to the large personal liability sometimes imposed on lawyers and accountants for the professional mapractice of their partners, Texas enacted in 1991 the first statute permittig the formation of Limited Liability Partnership (LLP)
An LLP is managed by its partners, who have equal say in the business of the partnership, unless they agree otherwise. An LLP has no life apart from its partner and a partner’s ownership interest in an LLP is not freely transferable.
The LLP is an especially good form of business for professionals such as accountants, allowing them flexibilty of management, while insulating them in part from personal liability. As more states adopt LLP statues, the LLP will become the preferred form of business for professionales, who do not incorporate.
Most states allow professionals such as lawyers, doctors, and accountants to form a limited liability partnershipor “LLP.”The LLP is designed to protect innocent partners from malpractice or negligence claims resulting from the acts of another partner. LLPs generally carry large insurance policies as protection against malpractice suits. These professional partnerships vary in size from a medical partnership of three to five doctors, to 150 to 200 partners in a large law firm, to more than 2,000 partners in an international accounting firm.
The example of LLP:
A corporation is owned by shareholders who elect a board of directors to manage the business. The board of directors often selects officer to run the day-to-day affairs of the business. Consequently, ownership and management of a corporation may be completely separate. No shareholder has the right to manage, and no officer or director needs to be a shareholder.
A corporations has a life separate from its owners and its managers. When a shareholders or manager dies or otherwise leaves the business, the corporation is not dissolved.
Corporation company (principal / holding / parent) legal entities that have a lot of companies under it. (Members) where he has rights and obligations of the different members of the company. The difference can vary, both in terms of business or core business.
Incorporation (Inc.) is a new company form of Corporation. Incorporation ownership is transferable (stock can be traded freely).
Several reason why persones organize a business as a corporation:
- .No human has unlimited liability for the debts of the business. As a result, businesses in the riskiest industries – such as– manufacturing– incorporate;
- Because investors may contrivute capital to the business, avoid unlimited liability, escape the obligation to manage the business and easily liquidate their investment by selling their shares. The corporation has the ability to attract large amounts of capital, even more than the limited partnership, whose partnership interests are not as freely transferable. Thus, the corporation has the capacity to raise the largest amount of capital.
The example of Corporation:
5. LIMITED LIABILITY COMPANY
Like a corporation, a limited liability company or “LLC,” is a separate and distinct legal entity. This means that an LLC can get a tax identification number, open a bank account and do business, all under its own name.
One of the primary advantages of an LLC is that its owners, called members, have “limited liability,” meaning that, under most circumstances, they are not personally liable for the debts and liabilities of the LLC.
For example, if an LLC is forced into bankruptcy, then the members will not be usually be required to pay the LLC’s debts with their own money. If the assets of the LLC are not enough to the debts and liabilities, the creditors generally cannot look to the owners for payment. Their debt was with the LLC, not the people that owned the LLC.
LLCs aren’t bound by the same rigid rules of corporations, but this doesn’t stop them from being just as useful. It doesn’t matter if you’re a one-man business or if you have hundreds of employees, an LLC keeps protecting you while allowing for expansion and growth. With an LLC, there’s no requirement for special meetings, extensive corporate records, or many other formalities. Limited liability companies are even flexible when it comes to taxes, offering lots of options so you can create a tax plan that works for you.
LLC is a business form intended to combine the non tax advantages of corporations with the favorable tax treatment of partnership.
An LLC is owned by members, who may manage the LLC themselves or elect the manager or managers who will operate the business. Members have limited liability for the obligations of the LLC.
This simplicity, protection, and ease of use have made forming an LLC a popular choice for small businesses in America.
In Indonesia, LIMITED LIABILITY COMPANY called as PERSEROAN TERBATAS.
The example of LIMITED LIABILITY COMPANY:
Franchising is an agreement by which a frachisee has the right to sell goods or services under a marketing plan prescribed in substantial part by a franchisor.
Thus, when a franchisee purchases a franchise, the franchises buys a business opportunity, which the franchisee may choose to operate as any form of business.
The esample of Frachise:
How about Form of Business Organizations in Indonesia?
Indonesian law provides for three distinct types of partnerships. As the basic legisation relating to partnerships dates from the colonial period, these are still referred to by their Dutch names:
- Maatschap (Indonesian :perseroan”;
- Firma (abbreviated “Fa);
- Commanditaire Vennootschap (abbreviated “C.V.).
In Indonesia also has Perum and Persero. Perum and Persero same features with Limited Liability Company, the one which makes them difference with Perseroan Terbatas is Perseroan Terbatas owned by private and Perum / persero owned by goverment.
Perum is 100% stock/share owned by goverment, Persero is minimum 51& stock/share owned by goverment.
Company with the together name in which there are allies who are personally responsible for the entire company. Regulated by Art.16 -35 Commercial Code and Article 1618 – 1652 Civil Code.
Features of FIRMA:
- The partnership is a result of a contract or an agreement that is entered into between the partners. It does not arise from birth, status or inheritance or succession.
- Nature of agreement:
- The contract or agreement between the persons may be oral or written. But usually, the contract is in writing.
- Competence to enter into contract:
- The persons who form a partnership must be competent or must have the capacity to enter into contract. Persons who do not have the capacity to enter into contract such as minors, insolvents, lunatics (persons with unsound mind) cannot become partners.
- Number of partners:
- To form a partnership at least two persons are required. The maximum number of partners is limited to 20, in case of general type of business and 10, in case of banking business.
- Presence of business:
- The agreement between partners must be to carry on some business which includes all lawful trade, occupation or profession. Hence, the presence of a business is a must and it does not cover any club or charitable association.
- Sharing of profits:
- The agreement between the partners must be 4 for making profits and sharing the profits among themselves.
- The partners share the profits in the agreed proportions.
- Principal-Agent relationship:
- Each partner acts in two capacities, i.e. he is both a principal and agent. As an agent, he can bind the other partners by his acts and as a principal; he is bound by the acts of other partners.
- The partnership business can be carried on by all the partners or by any one or more acting for all.
- Unlimited liability:
- The liability of partners is unlimited. If the firm fails to satisfy its debt, each partner is liable to repay out of his personal assets.
- Non-transfer ability of interest:
- A partner cannot, without the consent of other partners, transfer his interest in the firm to an outsider.
- Joint ownership:
- Each partner is a joint owner of the property of the firm and hence, in the eyes of law the firm and the partners are considered to be one and the same. Partnership has no separate existence apart from the partners composing it.
- Team spirit:
- The essence of partnership is based on the spirit of co-operation. Hence there should be mutual trust and mutual co-operation among partners.
2. CV (COMMANDITAIRE VENNOOTSCHAP)
- A limited partnership (CV) is a special form of the partnership under common firm (VOF).
- There are two sorts of partners: active partners and limited or sleeping partners.
- The active partner is active as an entrepreneur. The sleeping partner stays in the background and tends to finance the business. He has much less authority and bears less risk. He is not allowed to act as active partner and his name cannot be used in the name of the partnership.
- A limited partnership tends to develop from a sole trader or general partnership when a sleeping partner enters the business to provide extra finance for growth.
- A partnership agreement is not compulsory, but is in fact essential. The agreement states the length of the limited partnership, the contribution, authority, profit share and the arrangements for resignation of the two sorts of partners. You can either ask a civil notary to draw up the contract or do it yourself using a model contract.
- ESTABLISHMENT CV does not require CERTAIN FORMS
- BANKRUPTCY OF CV IS BANKRUPTCY OF ALLIED COMPLEMENTARY
3. PERSEROAN TERBATAS
- PT is a legal entity which is a capital alliance, established under the agreement, engage in business with a capital base that is entirely divided into shares and meet the requirements specified in the legislation
- Regulated in Article 40,43,45 Commercial Code dan Law Number 40 of 2007 about PERSEROAN TERBATAS.