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."

Four types of firms

Sole Proprietorship

Partnership

Limited Liability Company

Corporation

Sole Proprietorship

A Business Owned and run by one person.

Usually small

Most common type of firm (71%)

5% of business revenue comes from SP

Partnership

A business owned and run by more than one owner.

Limited Partnership

A partnership with two kinds of owners: General partners and limited partners.

General Partners - Have the same rights and privileges as partners in any general partnership.

Limited Partners - Have limited liability (limited to their investment).

Limited Liability Company (LLC)

A limited partnership without a general partner. Owners are referred to as members and have
limited liability.

Relatively new in the US

Corporation

A legally defined, artificial being, separate from its owners. Limited Liability

Artificial Being

C Corporation

Corporations that have no restrictions on who owns their shares or the number of shareholders; they
cannot quality for subchapter S tax treatment and are subject to direct taxation. (subject to double
taxation)

S Corporation

Those corporations that elect subchapter S tax treatment and are exempted by the U.S. Internal
Revenue Service's tax code from double taxation. (They don't pay corporate taxes)

Dividend Payments

Payments made at the discretion of the corporation to its equity holders.

Equity

The collection of all the outstanding shares of a corporation.

Equity Holder, Shareholder, Stockholder

An owner of a share of stock or equity in a corporation.

Stock

The ownership or equity of a corporation divided into shares.

The Valuation Principle

The value of a commodity or an asset to the firm or its investors is determined by its competitive
market price. The benefits and costs of a decision should be evaluated using those market prices.
When the value of the benefits exceeds the value of the costs, the decision will increase the market
value of the firm.

Advantages of a Sole Proprietorship

1. Easy to setup

Disadvantages of a Sole Proprietorship

1. Unlimited owner Liability

2. Limited to one owner

3. Difficult to transfer ownership

4. Life of SP is limited to the life of the owner

Advantages of a Corporation

1. No limit to the number of owners.

2. Life of corporation extends beyond the death of the owners.

3. Liability of owners is limited to the amount of their investment in the firm.

Disadvantages of a Corporation

1. Income is subject to double taxation

2. Corporation is more complicated and more expensive to setup

Disadvantages to a partnership

1. All partners are fully liable for firms debt

2. Partnership ends with the death or withdrawal of any single partner