The famous Coase Theorem implies that individuals will organise themselves into businesses if transaction costs of conducting an independent business are higher than such costs when they happen to be working for an organised business, ie, firm.

Transaction costs include information costs, documentation and contract costs and costs associated with enforcement of contracts. Thus, if a carpenter finds it difficult to connect himself to his customers, does not know how to document transactions and finds it difficult to recover compensation from the customers, he would prefer to work for a firm or company that buys his services for a fixed wage.

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