More of the Self Employed Incorporate

Although the incorporated share of self-employment declined slightly last year, the trend over the past two decades has been towards increased incorporation.

With all due credit to Steve King, who looked at this topic about a year ago in his blog, I’m offering my own take on it today.

In the figure below, I’ve plotted the incorporated share of self-employment since 1989 using data from the Bureau of Labor Statistics (BLS).  Since 1989, the share of non-agricultural self-employment that is incorporated has increased almost ten percentage points from 27.8 percent to 37.1 percent.  The pattern is pretty similar when the agricultural sector is included.

This trend is about as close to a true linear trend as one gets with real economic data.  For self-employment in the agricultural and non-agricultural sectors combined (the thick red line in the graph), the fit of a straight line to the data is 0.97 (it would be 1.00 if the increase in the actual data over time was a perfectly straight line).

The Self-Employed Incorporate

So why are more self-employed people incorporating? Several possibilities come to mind (some of which were highlighted by Steve King and other authors in their posts):

  • Limited liability might be more important today than it was two decades ago given the greater legal exposure that people running their own businesses face.
  • Lower costs and greater ease of incorporating might be motivating more people to do it.
  • The rising cost of health insurance might be driving some people to incorporate to deduct the costs of medical coverage.
  • Groups of people who are more likely to incorporate their businesses – those older and more highly educated, for instance – might be becoming self-employed at higher rates than other groups.
  • Self-employment might be shifting to industries in which incorporating is more valuable.
  • The tax benefits of incorporated self-employment might be rising.

Unfortunately, these possibilities are only speculation on my part. While the trend towards greater incorporation of self-employment is clear from the data, researchers haven’t yet identified the causes.

And that might not be so easy to do. Despite a clear linear trend toward greater incorporation of self-employment over the past two decades, the vast majority of self-employed people still don’t incorporate. Therefore, any explanation for this upward trend needs to account for why the increase is very gradual and remains confined to a minority of those in business for themselves.

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

9 Reactions
  1. It may also be that places like Leal Zoom offer an easy way to incorporate at a low cost. Prior to services as such, you likely hired a lawyer.

  2. In order to maximize the return on investment from the effort, risk and capital investment of self-employment, you need to be thinking about eventually reaching the point where you have a “real” business, which I define as one you can walk away from for an extended period of time (and eventually walk away from permanently by selling it) without causing a significant loss of sales revenue or decline in customer satisfaction with the products and services being provided. Substantially more than half of the total “wealth” created by a business is realized not from salaries and bonuses but rather when the business is sold, but you can’t sell a business if it is totally dependent upon you, the only person in the business or the only person capable of doing whatever it is that the business does for its customers. As self-employeds (or what the government calls “non-employers”)consider expanding their business to the next level, they should take the step of forming a legal corporation for all of the excellent reasons cited in this article. See Chapter Two (“Take This Job and Shove It”) in my book “Creating Wealth With a Small Business” where I delve into the transition from self-employment to business formation and provide some concrete case studies of how this transition typically occurs. Forming a corporation is one of the important steps.

  3. I’m self employed and a few years back, my accountant recommended that I took the LLC route, but the more I look into incorporating my business, it makes a lot more sense on the tax side. I can definitely see why many people take this route.

  4. I think Scott Shane’s speculative list of reasons why people incorporate is right on the mark. I would add an additional possibility. I am a business consultant and usually when I am working to get a client, one of the first things that happens is the potential client checks me out. One of the first places he goes is to the Arizona Corporate Commission where every company in Arizona is recorded and must make an annual report. If my company was unlisted, chances are the potential client would not consider me further.

    In my case, the reasons for incorporating were the liability protection and the tax benefits that incorporation brings. The tax benefit depends on which legal structure you select. Most of the consultants I have talked to have incorporated for the same reasons.

    Your attorney needs to be a key player in the decision to incorporate because he or she will guide you to the legal structure that best meets your objectives (S Corp, LLC, C Corp, etc).

  5. Great post Scott! Thank you for posting.

  6. Great comments above, but I think that the increasingly litigious environment in the US has been a big motivator for a lot of businesses. Add in the tax benefits and you have two big reasons for incorporation.

  7. Hey Scott,
    Just a thought. It probably has something to with TAX or LEGAL. Most times that’s what incorporation is all about. Getting a benefit in one of those two areas. Just a hunch of mine so I could be wrong.

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