Abstract Organizational form is among the most fundamental of business decisions. Among other possible influences, it is often asserted that differences in the taxation of various organizational forms systematically affect this decision. Because small businesses undertake the vast majority of organizational form decisions and are not necessarily limited to the corporate form for nontax reasons, they are the most likely businesses to be affected by tax considerations. This study examines the extent to which the choice of organizational form by small businesses is influenced by tax and nontax factors. We utilize a multinomial logit model to analyze the selection of organizational form for a sample of small businesses organized as taxable (C) corporations, electing Subchapter S (S) corporations, partnerships, and proprietorships. We conduct a separate logit analysis for single-owner and multiple-owner firms. The logit results suggest that nontax factors (e.g., business risk) are important considerations in the selection of an organizational form. However, the logit analyses provide only partial support for the hypothesis that income taxes are an important consideration in the selection of an organizational form.
Ayers et al. (Mon,) studied this question.