We have long argued that the American economy benefits from allowing entrepreneurs multiple business forms from which to choose.
Each business has its own unique capital, management, governance, and transition challenges, and allowing those businesses to choose between C corporations, S corporations, LLCs, partnerships, and sole proprietorships enables them to pick the structure that best suits their needs.
New data from SNL Financial focused on banks suggests entrepreneurial choice may also contribute to a bigger economy. As described in American Banker:
The return on assets at the median S corp has consistently outdistanced the median for C corps by a wide margin over the past six years, even after adjusting earnings for S corps as though they paid corporate taxes, according to data from SNL Financial. In 2011, the median was 0.89 percent for S corps and 0.58 percent for C corps. (Unadjusted, the median for the S corps was 1.13 percent.)
The median return on equity for the S corps also consistently beat the median for C corps by a large gap, while median leverage, as measured by equity to assets ratios, was roughly on par between the two groups. (Institutions considered here had less than $500 million of assets at year end and did not change their tax status between 2006 and 2011.)
S corps are entities with fewer than 100 shareholders that elect to pass their tax liabilities through to their owners, avoiding the double taxation of income that applies to ordinary C corps.
There is no reason that S corp status should translate into better fundamental performance, but perhaps smaller ownership groups tend to demand more from executives. Or perhaps executives at S corps are more likely to have big ownership stakes themselves.