How Do Firms Choose Legal Form of Organization?
40 Pages Posted: 26 Mar 2012 Last revised: 30 Jul 2018
Date Written: July 16, 2018
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, LLC, legal form of organization, organizational form, partnership, proprietorship, small business, start-up
JEL Classification: G21, G32, J71, L11, M13
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