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What is a 'Firm'

A firm is a business organization, such as a corporation, limited liability company or partnership, that sells goods or services to make a profit. While most firms have just one location, a single firm can consist of one or more establishments, as long as they fall under the same ownership and, typically utilize the same Employer Identification Number (EIN). The title "firm" is typically associated with business organizations that practice law, but the term can be used for a wide variety or business operation units, such as accounting. "Firm" is often used interchangeably with "business" or "enterprise."

BREAKING DOWN 'Firm'

In economics, the theory of the firm attempts to explain the reasoning behind why firms exist, why they operate and produce as they do, and how they are structured. It asserts that firms exist in order to maximize profits. This theory changes as the economic marketplace changes, and more modern theories distinguish between firm models that work toward long-term sustainability and those that aim to produce high profit levels in a short period of time.

Types of Firms by Ownership

There are several types of firms that differ from each other based on their ownership structures. One type of firm is a sole proprietorship, or sole trader. A sole proprietorship is owned by one person, and consequently, that person is liable for all costs and obligations. The benefit is that all aspects of the business belong to that person, including all assets.

Another type of firm is a partnership, which is a business owned by two or more people. Similar to a sole proprietorship, the owners in a partnership are each liable for all business obligations, and they own everything that belongs to the business. There is no limit to the number of partners that have a stake in ownership.

A third type is a corporation. The difference here is that the financial liability of the business is separate from the personal liability of the owners, so they have limited liability, which means the owners are not liable for any costs, lawsuits, or other obligations of the business. A corporation can be owned by individuals or by a government. Corporations, although business entities, can operate under many of the same parameters as an individual (for example, taking out loans, entering into contract agreements, and paying taxes). A firm owned by multiple people is often called a company.

A fourth type of firm ownership is a cooperative, or a co-op. A cooperative is similar to a corporation in that its owners have limited liability, but the difference is that its investors have say into the company's operations.

While business activities are typically conducted under the firm's name, the legal protection to employees or owners depends on the type of organization it was created under. Some organizational types, such as corporations, provide more protection than others.

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