When I think of firms, I mostly think of law firms, which is a just a group of lawyers that work together. Before this, I never knew that ‘firm’ and ‘businesses could be used interchangeably.
A firm, or business, is an organization that produces goods and services that are sold to make a profit. Firms mostly exist and work in a capitalist economy. Firms are made up of employees that work under some type of higher management. A firm owned by multiple people can be called a company. As far as ownership, they are usually privately owned and can either be its own incorporated company or part of a partnership.
There are different types of ownership that firms can fall under. These different types of ownership depend on how many owners there are and if the owners have full or limited liability. To have liability in a firm means that the owner is responsible for the debt or obligations that the firm has to deal with. The most common types of firms are: sole proprietor, a partnership, corporation, and a cooperative. A sole proprietor is when a firm is owned by one person. The sole owner of this firm is liable for the entire firm but, but also gets all of the assets to themselves. A partnership is a firm owned by two or more people in which they are equally liable for the company, they then can split the assets however they wish. There are also partnerships in which a partner can be given limited ownership and is has limited liability over the firm. In a corporation, the owners have limited liability and the legal rights of the firm are separate from the owners. Basically, the firm is not directly tied into the owners own personal liabilities. Corporation can be owned by a person or owned by the government. And finally, a cooperative, or co-op, is similar to a corporation where the owners have limited liability over the firm, but in this case the investors have a say in how the firm is run. Each of these then have sub categories, but those are the types of firm in extremely simple terms.
There is a series of economic theories that make up a larger theory called The Theory of the Firm. This theory is used to explain or predict the nature of the firm and its relationship to the market place. In these theories they try to explain why firms exist, why they work the way they do, and how they are structured. The theory also states that firms exists in order to maximize profits. Firms do this by interacting and working with the market in order to maximize those profits. So the behavior of the firm, and all those questions that the theory of the firm exists (the why they exists, how they work, and why they work the way they do) is directly linked with the market and deals with how to maximizes profits. Which, if you think about it makes sense. People almost always create businesses in order to make money at least that is the goal that they are trying to set. I think this also is a greater reason as to why firms only really exists in capitalist societies. The theory of the firm has a lot more going on and has been debated for years.