This blog post is for the readership of students. In my previous blog post, I relayed data in a blog post on Legal Whiteboard that 70.8% of legal fees in 2012 were generated by business clients in comparison to 23.9% by individuals. This blog post presents data showing the business incomes of various entity types as reported by the IRS in the years 1992 and 2012. (A chart would be better but I can’t seem to copy my chart from Excel into this blog post.)

1992:  C corporations (58.2%), S corporations (9.5%), partnerships (7.0%), sole proprietorships (25.2%)

2012:  C corporations (47.2%), S corporations (16.1%), partnerships (26.3%), sole proprietorships (10.3%)  

If business income has some relation to the demand for legal services, we see the landscape of the business clients. “Sole proprietorships” are business activities done through individuals and not through business entities. “Partnerships” are unincorporated business entities (including general partnerships, limited partnerships, and limited liability companies). “S corporation” and “C corporation” are corporations, and the letter indicates their tax status under tax law. This data is interesting for three reasons. First, they confirm that almost all business activity is now done through business organizations (this is why our law school’s courses in business organizations, such as Corporations, Unincorporated Business Enterprises, and Business Enterprises Survey, is so important). Notice the small percentage of sole proprietorships, which are individual persons engaging in business. Today, even Gina the owner of Gina’s pizzeria down the corner on Main Street is now doing business as “Gina’s Pizzeria, LLC.” Notice the inverse relationship between “partnerships” and “sole proprietorships” in the two time periods. Business clients are either business entities or they will want to create a business entity. Second, the data show that partnerships are growing in terms of share of business income. This is probably not due to a growth of partnerships, but instead is probably attributable to the rapid growth of limited liability companies (LLCs) as a preferred unincorporated business entity form since the late 1990s. Third, corporations are not growing as a share of business income, but they still claim a significant majority share of business income. It’s interesting to note also that the number of publicly traded corporations are decreasing: from 6,943 in 1991 to 5,401 in 2008, as reported by Grant Thornton (in 1997 the number of corporations was 8,823 but this is not the best comparison because the figures includes all the bad businesses that went public during the dotcom bubble). Others have also noticed the decline of the number of American corporations and connected this phenomenon to social implications such as economic inequity. Although the number of public corporations and thus concomitantly the number of corporate employees are decreasing (the causes of which may be many including going private transactions), the same is, I’m thinking, probably not true for their influence.

Credit: the IRS data was compiled by Professor Jason DeBacker, Department of Economics & Finance, Middle Tennessee State University.

Robert Rhee

Professor Rhee’s legal experience includes positions as a law clerk on the U.S. Court of Appeals for the Third Circuit, and a trial attorney in the Honors Program of the U.S. Department of Justice. He also has significant investment banking experience. He was a vice president in financial institutions investment banking at Fox-Pitt, Kelton (then a unit of Swiss Re) in New York, a real estate investment banker at Deutsche Banc Alex. Brown, and an M&A investment banker at UBS Warburg in London. He has worked on public and private M&A assignments, distressed restructurings, private equity funding, and debt and equity issuances. He is an active writer and scholar. His articles have been published in leading journals including New York University Law Review, Michigan Law Review, Northwestern University Law Review, Vanderbilt Law Review, Notre Dame Law Review, Emory Law Journal, William & Mary Law Review, and Florida Law Review.

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