Business Legal Status and New Firm Performance: Evidence from Kauffman Firm Survey

In this paper, we explore the characteristics of newly established firms with different legal forms of organization. Using the Kauffman Firm Survey (KFS), a panel study of businesses established in 2004, we examine the relationship between firm performance and its organizational form and how this relationship changes as firms transition between legal status. We show that firms that are organized into forms that provide liability protection have more debt, higher credit scores, and are more innovative than firms without liability protection. We also observe a larger share of B2B firms with liability protection. Our analysis also indicates that expanding firms, intending to fund their growth via investors' equity, exhibit a preference for C-corporations over S-corporations or LLCs.