It is important to differentiate between a firm and an industry. A firm is an individual business and an industry is the sector of the economy in which the firm operates. For example, a clothing shop operates in the retail industry and a factory that makes clothes operates in the manufacturing industry.
Firms are classified according to the sector of the industry in which they operate because it helps in the creating of economic data on the growth of different sectors of the economy.
Factors that determine the size of
the firm
The size of a firm is determined by many factors such as:
Size of the market: if there is only a small demand for the product or service, the firm will remain small.
Financial resources: in order to grow a firm will need finance for capital needs.
The size of the market share of the firm: a firm that has most or all of the market share (a monopoly) for a product has more potential for growth than a firm that operates in an industry with many competitors.
Stage of growth of the firm: many firms start off small but grow to be huge.
Location of the business: for growth a firm needs access to a market and/or infrastructure such as roads and railway,
Management experience: large firms require different forms of expertise.
The different types of business organisation
Businesses can chose to operate in a variety of different business structures. The choice of which structure is suitable depends on a variety of factors including size of the firm, number of owners and
the amount of finance available, For example someone starting a small shop might start off as a sole trader but if the shop grows and other branches are established, the owner might change
the structure to that of a private company.
The different types of business organisation are:
- Sole proprietors
- Partnerships
- Private limited companies
- Public limited companies
- Co-operatives
- Public corporations
- Franchises.
The formation and features of
the different types of business organisations
Sole proprietors (sole trader)
A sole proprietorship, also known as the sole trader or simply a proprietorship, is owned and run by one person and there is no legal distinction between the owner and the business. She/he contributes all the capital or borrows it from someone else, usually manages the business alone and/or with the help of employees, bears all the
responsibilities and gains all the profits.
Partnerships
A partnership is an association of two or more persons engaged in a business enterprise in which the profits and losses are shared proportionally. The owners contribute or combine their skills,
experience, labour, goods, knowledge and capital make and share profits. The actions of each affect the business as a whole and all the partners are responsible to the partnership and each other.
