National and State Data on Business Type and Size

Business Formation

Proprietor and pass-through entities are often used as a proxy for “small businesses” but tax data reveal many of them are not small.

Table 3 lists the number of business filing tax returns by organizational form. Most business owners—72 percent nationally and 66 percent in Minnesota—report their income as proprietors rather than bothering to form a business entity. Although most advisors consider LLCs, electing to be taxed as a partnership or proprietorship, to be the entity of choice, most business owners who choose to form a business entity elect S corporation treatment.6 One likely explanation for the continued popularity of S corporations is the favorable treatment of S corporation profits under the Social Security and Medicare taxes, as compared with partnerships and LLCs. The number of C corporations is gradually declining both nationally and in Minnesota.7 This likely reflects the tax disfavored status of these entities, as described above. Research suggests that reduction of the top individual income tax rate to a level at or below the corporate rate was a pivotal factor in this decline.8

Table 3

Number of Businesses by Type Tax Year 2007 (amounts in 000)

Business type National % of total Minnesota % of total
Sole proprietors (nonfarm) 23,127 72.1% 380 65.5%
S corporations 3,990 12.4% 96 16.5%
Partnerships (including LLCs) 3,096 9.7% 57 9.8%
C corporations 1,865 5.8% 47 8.2%
Total 32 0 78 580
Source: Statistics of Income, Internal Revenue Service (national); Minnesota Department of Revenue (Minnesota)

Businesses report income and pay taxes as a function of how they are organized, not their size, and most tax data similarly are compiled based on the type of business organization. While the term “small business” is used frequently in policy discussions and in the media, there is no agreement on a single definition of “small business” for tax purposes.9 Most people likely think that whether a business is “small” depends upon how many employees, assets, sales, or profits it has, not its form of organization. However, because most tax data are presented by organization type and because virtually all publicly held companies are C corporations, many naturally assume that sole proprietors and pass-through entities are “small businesses.” National tax data reveal that this generalization or assumption can be misleading.
There are very big S corporations and very small C corporations. Figure 1 shows the distribution of nonfarm businesses by organization and amount of gross receipts for 2005 based on national data.10

Figure 1: Businesses by Organization and Gross Receipts, 2005

Figure 1: Businesses by Organization and Gross Receipts

C corporations are most likely to have gross receipts over $1 million (22.9 percent); but a large share of S corporations (16.9 percent) also have gross receipts over $1 million. Large businesses tend to be C corporations; in 2007 about 6 percent of all tax-filing businesses were C corporations, but C corporations collected 62 percent of business gross receipts.11 A substantial fraction—nearly a quarter—of C corporations had gross receipts under $25,000. Both sole proprietorships and partnerships are more likely to have low levels of gross receipts. All this suggests caution in thinking that all C corporations are “big” businesses and that all S corporations and partnerships are “small” businesses. Moreover, a small number of pass-through entities earn most of the aggregate net income of these businesses. For example, in 2005 over 57 percent of the net income of all partnerships in aggregate was attributable to firms with annual gross receipts exceeding $50 million.12 Similarly, less than 1 percent of partnerships in 2008 had assets in excess in $100 million, but these partnerships earned over 53 percent of the aggregate net income of all partnerships.13 There are some highly publicized “big” S corporations and partnerships. For example, the Tribune Company, a large media company that owns 23 television stations and 12 newspapers, including the Chicago Tribune, Los Angeles Times, and Baltimore Sun, and the Chicago Cubs baseball team, was formerly a publicly traded C corporation, but converted to a privately held S corporation in 2007 in a total deal valued at about $13 billion ($8.2 billion in equity).14

The content of this and any related posts has been copied or adopted from the Minnesota House of Representatives Research Department’s Information Brief, Taxation and Small Businesses in Minnesota, written by legislative analysts Nina Manzi and Joel Michael.

This post is also part of a series of posts on the tax implications of different business entity types.

6 The LLC form provides its owners with the liability protection of a corporation, while partnership taxation is more flexible than S corporation taxation. See, e.g., Schwidetzky, “Integrating Subchapters,” 749, 759 (“[L]imited liability companies (LLCs), which are usually taxed as partnerships, in most contexts make S corporations obsolete.” “Most tax professionals will affirm that on balance a partnership is, from a federal income tax perspective, superior to an S corporation.”). This gap has, however, been closing. The Minnesota growth rate for partnerships between 2000 and 2008 was 9.4 percent, while the number of S corporations grew by 6.6 percent over the same period. If this pattern continues, partnerships (mainly LLCs taxed as partnerships) will ultimately displace S corporations as the most popular business entity.

7 In tax year 1986, 2.6 million C corporations filed federal returns (or about 14.9 percent of all business filing returns). For tax year 2007, that number had declined to 1.9 million filings (or about 5.9 percent of all business filings). Partnerships (including LLCs) and S corporations experienced a dramatic rise in filings over the same period, increasing from 2.5 million to 7.1 million. Statistics of Income, Internal Revenue Service, Integrated Business Data, accessed October 4, 2010,,,id=152029,00.html. Minnesota filings of C corporations in 1986 were 53,226. By 2005 (the last year for which data is available), these filings had declined to 47,990 (or an 11 percent drop). Minnesota Department of Revenue, 2005 Minnesota Corporate Income Tax Bulletin (November 2009): 6, accessed October 4, 2010,; Minnesota Department of Revenue, “Corporation Income Tax Returns Filed During Calendar Year 1986,” Income Tax Bulletin no. 67 (April 1988): 7.

8 Prior to the 1986 tax reform, the top federal individual rate was four percentage points higher than the top rate applicable to C corporations. This provided a slight rate advantage for C corporation status for a business planning to retain its earnings. Following the 1986 tax reform, the top individual rate was six percentage points lower than the top corporate rate. Thus, tax reform eliminated that rate advantage. After a series of changes in the 1990s and in 2001, the two top federal rates are now identical (at 35 percent for tax year 2010). Economists have concluded that the reversal of the top rates was an important factor in the growth of pass-through entities. Alan Auerbach and Joel Slemrod, “The Economic Effects of the Tax Reform Act of 1986,” Journal of Economic Literature 35, no. 2 (1997): 589–693.

9 Gary Geunther, “Small Business Tax Benefits: Overview and Economic Rationales,” Congressional Research Service (revised March 3, 2008): 3, fn. 4, , cites a source that the Internal Revenue Code contains “at least 24 different definitions of a small business”; accessed June 11, 2010,

10 Statistics of Income, Internal Revenue Service, from “Tax Reform: Selected Federal Tax Issues Relating to Small Business and Choice of Entity,” Joint Committee on Taxation, JCX-48-08, June 4, 2008.

11 Statistics of Income, Internal Revenue Service, “Table 3.–Number of Businesses, Business Receipts, Net Income, and Deficit, by Form of Business and Industry, Tax Year 2007,” accessed September 14, 2010,,,id=152029,00.html.

12 Ibid., Table 8a, p. 20.

13 Statistics of Income, Internal Revenue Services, Partnership Tax Statistics, accessed September 3, 2010,,,id=130919,00.html.