What Is a Firm?

A firm is a for-profit business organization—such as a corporation, limited liability company (LLC), or partnership—that provides professional services. Most firms have just one location. However, a business firm consists of one or more physical establishments, in which all fall under the same ownership and use the same employer identification number (EIN).

When used in a title, "firm" is typically associated with businesses that practice law, but the term may be used for a wide variety of businesses, including accounting, consulting, and graphic design firms.

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Firm

Understanding Firms

In microeconomics, the theory of the firm attempts to explain why firms exist, why they operate and produce as they do, and how they are structured. The theory of the firm asserts that firms exist to maximize profits; however, this theory changes as the economic marketplace changes. More modern theories would distinguish between firms that work toward long-term sustainability and those that aim to produce high levels of profit in a short time.

Key Takeaways

  • A firm is a for-profit business, usually formed as a partnership, that provides professional services, such as legal or accounting services.
  • The theory of the firm posits that firms exist to maximize profits.
  • Not to be confused with a firm, a company is a business that sells goods and/or services for profit and includes all business structures and trades.
  • A business firm has one or more locations which all have the same ownership and report under the same EIN.

Firm vs. Company

Although they appear synonymous and are often used interchangeably, there is a difference between a firm and a company. A company can be any trade or business in which goods or services are sold to produce income. Further, it encompasses all business structures, such as a sole proprietorship, partnership, and corporation. On the other hand, a firm typically excludes the sole proprietorship business; it generally refers to a for-profit business managed by two or more partners providing professional services, such as a law firm. In some cases, a firm can be a corporation.

Types of Firms

A firm's business activities are typically conducted under the firm's name, but the degree of legal protection—for employees or owners—depends on the type of ownership structure under which the firm was created. Some organization types, such as corporations, provide more legal protection than others. There exists the concept of the mature firm that has been firmly established. Firms can assume many different types based on their ownership structures:

  • A sole proprietorship or sole trader is owned by one person, who is liable for all costs and obligations, and owns all assets. Although not common under the firm umbrella, there exists some sole proprietorship businesses that operate as firms.
  • A partnership is a business owned by two or more people; there is no limit to the number of partners that can have a stake in ownership. A partnership's owners each are liable for all business obligations, and together they own everything that belongs to the business.
  • In a corporation, the businesses' financials are separate from the owners' financials. Owners of a corporation are not liable for any costs, lawsuits, or other obligations of the business. A corporation may be owned by individuals or by a government. Though business entities, corporations can function similarly to individuals. For example, they may take out loans, enter into contract agreements, and pay taxes. A firm that is owned by multiple people is often called a company.
  • A financial cooperative is similar to a corporation in that its owners have limited liability, with the difference that its investors have a say in the company's operations.