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United States Small Business Administration
Office of Advocacy
RS 154
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Purpose
The organization of business operations can be a difficult and complex task, requiring managers to understand not only their products and markets, but also numerous aspects of business law. The tax code adds another level of complexity to these business decisions.
The objective of this study was to examine the role taxes play
in organizational decisions. Specifically, this study focused
on the role of taxes in choosing between two different corporation
entities-C corporations and S corporations-primarily explaining
the tax rules surrounding S corporations. Recent legislative changes
have made S corporations an increasingly important part of the
corporate sector, particularly for small business. The advantage
of an S corporation is that while a firm can retain nearly all
of its nontax corporate characteristics, it is essentially
exempted from the U.S. corporate income tax. Corporate income
instead flows through directly to the shareholders, as in a partnership.
Scope and Methodology
This report provides an overview of the tax rules and tax considerations affecting corporations. In addition, the report examines accounting, economic, and legal research to identify a common set of personal and financial characteristics that should influence the choice of organizational form. Analysis of the financial structure of closely held firms provides information on whether the organizational choice is motivated by tax minimizing strategies, and the extent to which firms' management operations are affected by the tax code. Financial characteristics include employee compensation, benefits, book income, gross corporate tax payments, interest paid, and carryover tax attributes.
Demographic characteristics of the firm, including size, age and industry characteristics, also were analyzed. Legal requirements studied included such factors as number of shareholders, passive income, lastinfirstout (LIFO) inventories and state tax treatment.
Crosssectional data were used to test empirical models of
the choice of corporate organization. Explanatory variables included
various measures of the firm's accounting, demographic and legal
characteristics.
Highlights
Ordering Information
The complete report is available from:
National Technical Information Service
U.S. Department of Commerce
5285 Port Royal Road
Springfield, VA 22161
(703) 487-4650
(703) 487-4639 (TDD)
Order Number: PB95239976
Cost: A06; A02 Microf.
*Last Modified 6-11-01