Pass-Throughs, Corporations, and Small Businesses: A Look at Firm Size Page: 4 of 11
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Pass-Throughs, Corporations, and Small Businesses: A Look at Firm Size
As Congress continues to discuss tax reform and general tax policies to promote economic
growth and job creation, it will likely maintain a particular interest in small businesses. Within
these discussions it is common to equate, or at least associate, "small" businesses with pass-
through businesses (e.g., sole proprietorships, partnerships, limited liability companies, S
corporations).' An obvious question is then, are all small businesses also pass-throughs?
Relatedly, are all large businesses also C corporations? Answering these questions may help to
better target particular tax, and non-tax, policies.
This report uses 2011 U.S. Census data to investigate how the size of businesses varies by legal
form (corporate and pass-through), as well as the distribution of employment across firm types.
Firm size is measured by using employment. The majority of both corporations and pass-throughs
in 2011 had fewer than five employees (56% of C corporations and 65% of pass-throughs). Over
99% of both corporations and pass-throughs had fewer than 500 employees, the most common
employment-based threshold used by the Small Business Administration (SBA).2 Thus, it appears
that based on an employment-based measure of size most businesses were small, with the exact
share depending on the definition chosen.
Looking further into the data reveals that while the majority of firms were small, the largest firms
accounted for the majority of employment. For example, slightly more than 50% of all employees
worked at firms with 500 or more employees. This statistic is being driven mostly, but not wholly,
by corporate employment. Roughly 73% of corporate employees worked at firms with more than
500 employees. In contrast, about 24% of pass-through employees worked at firms with more
than 500 employees. Thus, a nontrivial share of pass-through workers were employed at the
largest firms, but not to the same degree as in the corporate sector.
This report may prove useful to Congress when considering tax and non-tax policies directed at
businesses based on size. This report does not analyze questions related to the economics of
providing preferential tax treatment for small businesses, or the extent to which small businesses
are responsible for job creation in the economy.
Tax Treatment of Business Income
Before discussing the data in greater detail it may be helpful to briefly review the tax treatment of
business income. In the United States, how a business is taxed at the federal level is partly
dependent on how it is organized. The income of C corporations, often referred to as simply
corporations, is taxed once at the corporate level according to the corporate tax system, and then a
1 For example, in the 113th Congress, the House Committee on Ways and Means created 11 working groups to focus on
issues related to tax reform. The title of one of the working groups was "Small Business/Pass-Throughs." For the other
10 groups, see Committee on Ways and Means, "Camp and Levin Announce Ways and Means Tax Reform Working
Groups," press release, February 13, 2013, at http://waysandmeans.house.gov/news/documentsingle.aspx?
2 The SBA also uses a receipts-based measure of firm size for some industries. For a complete listing of the SBA size
standards, see U.S. Small Business Administration, Table of Small Business Size Standards Matched to North
American Industry Classification System Codes, at https://www.sba.gov/sites/default/files/files/
Congressional Research Service
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Pass-Throughs, Corporations, and Small Businesses: A Look at Firm Size, report, June 23, 2015; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc816079/m1/4/: accessed December 12, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.