7.1 What Are Firms?

We start by taking a brief look at the concept of a firm. How are firms
organized? How are they financed? What are their goals?

Organization of Firms

A firm can be organized in any one of six different ways.

1. A single proprietorship has one owner–manager who is

personally responsible for all aspects of the business, including its

debts. Many tradespeople such as painters, contractors, plumbers,

and electricians have small businesses of this type.

2. An ordinary partnership has two or more joint owners, each of

whom is personally responsible for all the partnership’s debts.

Many start-up businesses have this basic structure, at least while

they are small.

3. The limited partnership which is less common than an

ordinary partnership, provides for two types of partners. General

partners take part in the running of the business and are liable for

all the firm’s debts. Limited partners take no part in the running of

the business, and their liability is limited to the amount they

actually invest in the enterprise.

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