Entry-Level Entrepreneurs and the Choice-of-Entity Challenge

65 Pages Posted: 29 Jan 2016 Last revised: 2 Feb 2016

Emily Satterthwaite

University of Toronto Faculty of Law

Date Written: July 15, 2013


For first-time, lower-income and credit-constrained entrepreneurs (“entry-level entrepreneurs”), the employment tax savings proffered by a longstanding tax shelter known as the “Sub-S Shelter” can be particularly salient. Such hypersalience is problematic from a policy perspective. It not only increases the costs and complexity of the entry-level entrepreneur’s deliberation process concerning the appropriate entity for her business, but it distorts her incentives to choose the entity that best supports her business’s future growth. I argue that because the hypersalience of the Sub-Shelter is likely to be more pronounced for entry-level entrepreneurs than for entrepreneurs with more experience or better access to capital, the burdens of the shelter are distributionally regressive. As an alternative to full-scale reforms that would eliminate the demand for the Sub-S Shelter but may be politically infeasible, I suggest that the shelter’s regressive hypersalience can be addressed by government measures to provide choice-of-entity information tailored to the needs and concerns of entry-level entrepreneurs. Such targeted information can mitigate the hypersalience of the Sub-S Shelter by underscoring the risks of relying on it, while highlighting the real option value of choosing a more flexible business entity such as an LLC. By nudging entry-level entrepreneurs towards neutrality in regard to their choice-of-entity decisions, this approach has the potential to improve both the efficiency and the equity of a key step in formalizing a new business.

Keywords: Tax law, entrepreneurship, business law, default rules, corporations

JEL Classification: K34, K32

Suggested Citation

Satterthwaite, Emily, Entry-Level Entrepreneurs and the Choice-of-Entity Challenge (July 15, 2013). Pittsburgh Tax Review, Vol. 10, No. 1, 2013. Available at SSRN: https://ssrn.com/abstract=2724014

Emily Satterthwaite (Contact Author)

University of Toronto Faculty of Law ( email )

84 Queen's Park
Toronto, Ontario M5S 2C5

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