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Firms

Firms organise production by bringing together the factors of production through a production process with the result of making an output. There are many different forms of firms. The most basic is the sole proprietor, which is the owner of the firm who is also running the firm. The owner is liable for the debts of the firm but also gets to retain any profits.

Another form of firm is a partnership; this is where people own the firm and it is split equally between the partners. The obvious examples here are doctors and solicitors. The firm is governed by a contract which sets out the ownership and debt liability of the partners and how the firm will be run (this is in order to prevent arguments about decisions on the firms future).

Private companies are owned by shareholders who have contributed some funds to the business through buying its shares. The advantage of a company however is that the only liability the shareholder faces is their initial investment; unlike a sole proprietor or partner, they aren't responsible for any debt the firm may incur. Profits can be distributed to shareholders (if they are not retained by the company for growth) in the form of dividends. Private companies are usually managed by the shareholders and the shares aren't listed on a stock exchange. Firms that have Ltd after their name are usually companies of this kind, with Ltd meaning Limited Liability, this is to let customers or suppliers know that the shareholder's aren't responsible for any kind of debt. If a supplier where to give a product to a company on credit and the firm went under, then the supplier may lose money on the deal and it wouldn't be able to pursue the shareholder's for the money.

Companies that are listed on the stock exchange are known as public companies. The only difference between a public company and a private company is that public companies can list on an exchange and have to publish an annual account along with an annual report. General decision making is usually delegated to a board of directors which is composed of people appointed by the shareholders at the Annual General Meeting (AGM) which usually takes place once a year and which all shareholders have the right to attend. These firms are denoted with the letter plc (Public Limited Company) after their name. 

Page last updated on 20/10/13

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