It often happens that the differences between the two terms seem insignificant, so many people make the mistake of calling one the other. For example, it is believed that there is no fundamental difference between the terms “company” and “firm”. But if you study the definition of the terms in dictionaries, you will see that there are a number of differences between them.
Definition of a Firm
A firm is an organization that supplies a product or service. A firm’s goal is to make a profit. Firms can be categorized into two different types: Profit Maximizing Firms and Cost Minimizing Firms.
Profit Maximizing Firms are firms that aim to maximize their profits by producing at the point where the marginal revenue equals marginal cost. They do this by attempting to produce at the lowest possible cost, while still making enough money to cover their costs, as well as provide a profit for shareholders. These firms are also referred to as “markets.”
Cost Minimizing Firms are firms that aim to minimize their costs by producing as much output as possible at any given time period with only a fixed amount of resources available (i.e., they cannot change their production levels). These firms tend to operate in industries where there are high barriers to entry (i.e., it is difficult for new firms to enter due to large sunk costs).
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Definition of a Company
Company – the name comes from the French compagnie, which means society. By its activity, this type of organization is an association of several legal or physical persons. All together they make a common cause – to make a profit through the joint occupation of different types of economic activity. It can include: manufacturing, insurance, mediation, financial transactions, etc.
All the people in this association have some kind of rights and influence over the common activity. Regardless of which individuals are included (legal or natural persons), the company must necessarily be registered as a legal entity.
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What is the difference?
Since the first definition of the firm has more to do with intellectual property law, let’s use the second definition to make it clearer. Following these two definitions, it becomes evident that the first case requires an association of either legal or physical persons. A firm can also easily represent a business founded by a single person.
As a result, the conclusion infers that the company’s activity is more advanced. It may include multiple components at once. For instance, owning a chain of restaurants or hotels while also working in the transportation industry, the steel industry, the logging industry, and other industries is simple. However, a company can only carry out the activity for which it was founded.
And yet another. They all have equal rights in the management of the company’s affairs because they each have a voice on the board, which they can use to vote for decisions. Additionally, the parties’ relationships are unclear in a firm.
So:
- A firm can be founded by a single person, but a company must be founded by more than one entity or person.
- A company is bigger than a firm in terms of size.
- A company may participate in more than one activity at once, but they are limited to just one.
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Conclusion
In summary, there are a number of important distinctions between a firm and a company. A company is a legally recognized entity with multiple shareholders, whereas a firm is owned and run by one or more individuals. A firm typically covers a smaller geographic area than a company and is smaller in size. Finally, a company can provide a wide range of services, whereas a firm typically offers services that are specific to its owners.
