Legal Form Choice: Uncovering Influential Factors for Entrepreneurs in a Young Market Economy

38 Pages Posted: 2 Nov 2023

See all articles by Marta Kluzek

Marta Kluzek

Poznan University of Economics and Business

Marcin Bielicki

Poznan University of Economics and Business

Katarzyna Schmidt-Jessa

Poznan University of Economics and Business

Tomasz Gabrusewicz

Poznan University of Economics and Business

Katarzyna Perez

Poznan University of Economics and Business

Date Written: October 5, 2023

Abstract

This study aims to identify and hierarchize key factors for choosing legal form of business activity by entrepreneurs in a young economy, where the sole proprietorship or partnerships, and not companies, are dominant. We aim to find out whether this is a result of the desire to hide the actual income in order to pay less taxes or whether there are other determinants of such legal form choice. We utilize semi-structured interviews, a criteria ranking survey, and a pair comparison of the criteria based on Analytical Hierarchy Process (AHP) for a sample of over 30 enterprises of different legal forms from Poland, a young economy, that has caught up with the entrepreneurial achievements of mature economies in almost 30 years.

We find that that legal form choice is not a one-time decision, but it can be made several times during lifecycle of a business. This choice never depends on a single factor but on multiple factors which are interpenetrating. There are 5 top determinants of this choice: 1) fiscal efficiency, 2) flexibility of disposition of funds generated by the business, 3) limiting personal and property liability in business relationship, 4) formal and legal conditions of operations and 5) potential for business continuity. Fiscal efficiency and legal conditions of operations are equally important to all types of entrepreneurs. Flexibility in disposing the funds is a priority especially for sole proprietors. Liability is the essential matter for shareholders of companies. Finally, business continuity is a driver of decisions made by sole proprietors who transited their legal form to partnerships or companies. Overall, entrepreneurs from studied young economy do not avoid incorporating business activity. They choose civil legal forms when their business is small and young. When it grows or they plan it to grow they choose limited liability company.

Keywords: entrepreneurship, decision-making process, legal form of organization, emerging economy

JEL Classification: L26, D81, D91, H32

Suggested Citation

Kluzek, Marta and Bielicki, Marcin and Schmidt-Jessa, Katarzyna and Gabrusewicz, Tomasz and Perez, Katarzyna, Legal Form Choice: Uncovering Influential Factors for Entrepreneurs in a Young Market Economy (October 5, 2023). Available at SSRN: https://ssrn.com/abstract=4593382 or http://dx.doi.org/10.2139/ssrn.4593382

Marta Kluzek

Poznan University of Economics and Business

al. Niepodległości 10
Poznań, Poznań 61-875
Poland

Marcin Bielicki

Poznan University of Economics and Business

al. Niepodległości 10
Poznań, Poznań 61-875
Poland

Katarzyna Schmidt-Jessa

Poznan University of Economics and Business

al. Niepodległości 10
Poznań, Poznań 61-875
Poland

Tomasz Gabrusewicz

Poznan University of Economics and Business

al. Niepodległości 10
Poznań, Poznań 61-875
Poland

Katarzyna Perez (Contact Author)

Poznan University of Economics and Business ( email )

al. Niepodległości 10
Poznań, Poznań 61-875
Poland

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