Different Types of Firms

Sole Proprietorships, Partnerships, and Corporations

1. Sole Proprietorship - a company that has only one owner and this person has unlimited liability. This means they are fully responsible for the company. Example: If there's a local restaurant owned by one person and you want to sue the restaurant, you can sue the owner personally and try to take their possessions.

1. Partnership - a company that has two or more owners that have unlimited liability. Example: If there's a local restaurant with four owners and you want to sue the restaurant, you can sue each of the owners personally.

1. Corporation - a company where the owners are a separate entity to the company. The owners have limited liability. Most big companies become corporations to reduce the risk for the owners Example: If we want to sue Pepsi, we cannot sue the owners personally. We can only sue the company.

How do Firms Raise Capital?

1. Stocks - when we buy stocks in a company, we are buying part ownership in that company. If the price of the stocks that you bought goes up it is called a capital gain and if they go down it is called a capital loss. Example: If you buy $10,000 worth of stocks in Adidas, you will own a very small percentage (like 0.01%) of Adidas.
2. Bonds - when we buy bonds in a company, we are loaning them that money. Example: If you buy $10,000 worth of 5 year-bonds in Adidas, you have loaned them $10,000. They will pay you interest (also called coupons) every year and at the end of the 5 years they will give you your $10,000 back.