How Do Firms Choose Legal Form of Organization?

40 Pages Posted: 25 Sep 2010 Last revised: 26 Jul 2018

See all articles by Rebel A. Cole

Rebel A. Cole

Florida Atlantic University

Tatyana Sokolyk

Brock University - Department of Finance, Operations & Information Systems

Date Written: July 16, 2018

Abstract

In this study, we analyze the firm’s choice of legal form of organization (“LFO”). We find that only about one in three firms begins operations as a proprietorship, while almost as many begin as limited liability companies and as corporations. Moreover, this distribution is remarkably stable over the first seven years of the firm’s life. Fewer than one in ten firms changes LFO during its first seven years. Those that do change LFO disproportionately move to a more complex form, primarily from proprietorship to a form with limited liability. Our analysis of the firm’s initial choice of LFO reveals that a firm chooses LFO based upon factors that include access to capital markets, tax consequences, and personal liability and risk exposure. At start-up, the entrepreneur chooses a LFO that can accommodate the expected future complexity of her firm.

Keywords: corporation, entrepreneurship, Kauffman Firm Survey, LFO, LLC, legal form of organization, organizational form, partnership, proprietorship, small business

JEL Classification: D21, G32, M13

Suggested Citation

Cole, Rebel A. and Sokolyk, Tatyana, How Do Firms Choose Legal Form of Organization? (July 16, 2018). Available at SSRN: https://ssrn.com/abstract=1682263 or http://dx.doi.org/10.2139/ssrn.1682263

Rebel A. Cole (Contact Author)

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Tatyana Sokolyk

Brock University - Department of Finance, Operations & Information Systems ( email )

500 Glenridge Avenue
St. Catherines, Ontario L2S 3A1
Canada

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