Selecting a Legal Structure: Revisiting the Strategic Issues and Views of Small and Micro Business Owners
AbstractEntrepreneurs often make decisions about the legal structure of their new business without fully considering the effect of the decision on other strategically important concerns. The question of whether the new venture should be formed as a sole proprietorship, partnership, corporation, limited liability company or one of several other legal forms is a complex one. To effectively answer that question requires the founder to consider the advantages and disadvantages of each, and how the choice will affect four primary areas of concern: startup costs; the firm's exposure to legal liability; tax position; and finance options. This research addresses a gap in the literature and investigates the decision-making process of 513 founders of small and micro businesses in selecting a legal structure and clarifies other related concerns such as the source of entity structure advice, the factors influencing entity selection and the resultant confidence and satisfaction with the chosen legal structure. Findings suggest that small business owners who obtain counsel from accountants and/or attorneys are more likely to consider the full spectrum of implications of legal entity type and are generally more satisfied that their choice will positively affect firm profitability.
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