A firm is a corporate form of enterprise featuring a separation between individuals and investors. Corporations can trade and enter into contracts independent from its owners. Industrial revolution in the late 18th and 19th centuries, provided people an opportunity to run large scale commercial enterprises for long periods. Business people got involved in complex and long lived business ventures with activities spanning over wide geographical areas. General partnerships involved sharing assets and liabilities, its partners had considerable power of its benefits. Partnerships were vulnerable and frequently broke up; this made people opt to form joint stock companies.
In 1623, Dutch East India Company was granted the right of perpetual existence and was the first chartered company, later in the 17th and 18th centuries more organizations sought charters from the state to enjoy special privileges. Legally, unchartered joint stock companies were also in operation as partners engaged trustees in control and investment. After the American Revolution, companies took the corporate form as a preferred way to organize large and complex organizations. A company existed as an entity which liability was limited, shareholders could not dissolve the company rather exchange of shares were issued. Corporate form made it possible for investors, shareholders, creditors and employees to enter into long term relationships with greater assurance that a pool of assets would ensure longevity of the business.
In 1863, Singer Manufacturing had to reorganize to avoid liquidation after a potential disputes between heirs and investors. Currently, many emerging markets and transition economies lack institutional and legal support for corporate organizations. Russia and China failed to appreciate the capitalist system of corporate form, leading to misallocation of resources and economic centralization proved to be defective.
An economic system is coordinated by price mechanism and society as an organization. Sir Arthur Walter implies that the normal economic system works for itself and is under no central control. Marshall, J.B Clark and Professor Knight Base argue that organizations and economic planning are controlled by entrepreneurs. Additionally, outside the firm, price movements direct production and market. Coordination of factors of production is carried out without the intervention of a price mechanism. In economic theory, it is assumed that resources are allocated by means of price mechanism and consumption.
An entrepreneur takes up operation costs of a market and forms an organization in order to direct resources. Government exercises control to allocate resources not by price mechanisms alone but encourage growth and existence of firms. As a firm expands, transaction costs increases and the role of an entrepreneur decreases. The main reason why one big firm cannot carry out all transactions are; additional transactions costs, an entrepreneur failing to rightly place factors of production, and supply price rising. Firms always work out ways to minimize market transactions in open markets.
The reason for existence of firms is division of labor and increasing complexity of division of labor that creates the need for an integrating force, otherwise chaos would occur. An Individual in possession of knowledge of a situation organizes people within a firm to manage and control productivity. The size of a firm is determined by; marketing costs (use of price mechanism), costs of organizing different entrepreneurs, and amount of products produced by each firm. A firm, in summary consists of the relationship between the employee and employer. The employer has the right to control hours of service and terms of service which makes the employee an independent contractor.