Over the last few decades the LLC displaced the C corporation as the corporate form "of choice" for many entrepreneurs and closely-held corporations. According to many, while the C corporation benefited from comparative simplicity it was encumbered by tax disadvantages and governance "inflexibility." Despite a migration away from the C corporation among entrepreneurs, there has been quite little empirical work that directly engages with the "anti-C corporation" thesis or explores how C corporation selections distribute across entrepreneurs.
A recent paper, published in JELS, begins to fill this scholarly void. In Entrepreneurs' Legal Status Choices and the C Corporation Survival Penalty, Emily Satterthwaite (Toronto) explores whether "C corporations underperformed as compared to similarly situated businesses with alternative legal statuses." To do so the paper exploits "a large panel dataset that contains legal status, owner, business, financing, and other firm‐specific information collected from an eight‐year survey of nearly 5,000 enterprises that were formed in 2004." A summary of the paper's four key findings follow in the excerpted abstract.
"First, C corporation status is associated with firm failure rates that are 38 percent higher (significant at 0.1 percent) than those of non‐C corporations with similar characteristics. Second, this C corporation survival penalty persists at nearly the same magnitude and significance even after a subset of “anticipated cash‐exit” C corporations with (a) venture capital investors or (b) employee stock option plans are separated out. Third, nonwhite and foreign‐born entrepreneurs have a significantly higher likelihood of choosing C corporation status. Fourth, within the subset of firms that appear eligible to elect out of the default (subchapter C) corporate tax classification and into the tax‐advantaged subchapter S classification, nonwhite and older entrepreneurs are significantly more likely to remain in C corporation status. These findings suggest that increasing legal status complexity is unlikely to be neutral from a distributive perspective, and may be disproportionately burdensome for marginalized entrepreneurs."
Comments