Entrepreneur Wealth and Demand for Limited Liability

Abstract

Economic theory suggests that wealthy entrepreneurs demand limited liability to shield their personal assets. Yet, despite an extensive theoretical literature, there are no empirical studies which directly test this claim. Using restricted-access data from the Kauffman Firm Survey, I find a positive correlation between entrepreneur wealth and formation of a limited liability entity; but the economic magnitude of this effect is small and for many entrepreneurs the result cannot be attributed to exogenous variation in personal asset exposure. I use bankruptcy exemptions to identify exogenous variation in each entrepreneur’s asset exposure. My results are consistent with two interpretations, both of which challenge existing scholarship: (i) limited liability, while relevant, is a secondary consideration when choosing organizational form, at least for small owner-operated businesses, or (ii) entrepreneurs are largely unaware of personal bankruptcy exemptions.

Keywords: Limited liability, choice of form, property exemptions

JEL Classification: K22