Do Tax Considerations Still Matter in Firms' Choice of Organizational Form?

Proceedings of the Ninety- Eighth Annual Conference on Taxation

12 Pages Posted: 6 Nov 2013 Last revised: 9 Nov 2013

Date Written: November 5, 2005

Abstract

One of the distortions created by the corporate income tax is that it provides incentives to shift income between corporate and non-corporate forms. In 1997, the IRS significantly relaxed this distortion by adoption the "check-the-box" (CTB) regulation. Since then, small businesses have had the option to choose to be taxed as corporations, under the corporate tax system, or as partnerships, under the individual tax system. This paper used the CTB tax reform as a natural experiment to evaluate the relevance of tax and non-tax factors in companies' choice of organizational form. As expected, I find that the choice of business form was significantly dependent on both tax and non-tax factors until the CTB reform and non-tax factors were critical in this choice. After the CTB regulation, organizational choice became independent from non-tax considerations, while tax factors became critical.

Keywords: Organizational Form, Corporate Taxation, Check-The-Box

JEL Classification: H25, G31, E01

Suggested Citation

Dauchy, Estelle P., Do Tax Considerations Still Matter in Firms' Choice of Organizational Form? (November 5, 2005). Proceedings of the Ninety- Eighth Annual Conference on Taxation. Available at SSRN: https://ssrn.com/abstract=2350120

Estelle P. Dauchy (Contact Author)

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