What Is a Firm?
A firm is a business organization—such as a corporation, limited liability company (LLC), 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 physical establishments, as long as they fall under the same ownership and utilize 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. "Firm" is often used interchangeably with business, company, or enterprise.
Meaning of "Firm" in Economics
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.
Firms Differ by Type of Ownership
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. Firms can assume a number of different types based on their ownership structures:
- One type of firm is a sole proprietorship or sole trader. A sole proprietorship is owned by one person, who is liable for all costs and obligations, and owns all assets.
- 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' personal 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.