About Firms
A firm is a unit that does business on it's own account. (Firm is from the Italian, "firma," a signature, and the idea is that a firm can commit itself to a contract). Thus, the firm is the decision-maker in supplying goods and services.
There are three main kinds of firms in modern market economies:
- Proprietorships
- A proprietorship (or proprietary business) is a business owned by an individual, the "proprietor." Many "Mom and Pop stores" -- and other "Mom and Pop" businesses -- are proprietorships. Some proprietorships are too small even to employ one person full time. Craftsmen, such as plumbers and painters, may have "day jobs" and work as self-employed proprietors part time after hours. Computer programmers and others may also do that. At the other extreme, some proprietary businesses employ many hundreds of workers in a wide range of specializations. In a proprietorship, the proprietor is almost always the decision-maker for the business.
- Partnerships
- A partnership is a business jointly owned by two or more persons. In most partnerships, each partner is legal liable for debts and agreements made by any partner. Of course, this requires a great deal of trust, and thus partners generally know one another well enough to have that sort of trust. Family partnerships are very common for that very reason. (There are now a few "limited partnerships" in which some partners are protected from legal liability for the agreements made by others, beyond some limits). In many cases, one partner is designated as the managing partner and is the main decision-maker for the business.
- Corporations
- A corporation has two characteristics that distinguish it from most proprietorships and partnerships:
- Limited liability
- Anonymous ownership
Limited liability means that the owner of shares in a corporation cannot lose more than a certain amount if the company fails. Usually the amount is the money paid to buy the shares. Anonymous ownership means that the owner of the shares can sell them without getting the permission of anyone other than the buyer. By contrast, in most partnerships, no one partner can sell out without getting the agreement of the other partners. In such a case the continuing partners will, of course, want to know about the new partner -- he will not be an "anonymous owner." In a typical corporation, the shareholders formally elect a board of directors, who in turn select the officers of the company. One of these officers, often called the "president," will be the principle decision-maker for the firm, but he will be expected to make decisions in the interest of the shareholders.
While there are millions of proprietorships, typically very small, the biggest businesses are corporate and corporations are particularly important because of their size.
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