CRS Report: Pass-Throughs, Corporations, and Small Businesses: A Look at Firm Size

From the summary of Pass-Throughs, Corporations, and Small Businesses: A Look at Firm Size (June 23, 2015 R44086):

In debates over tax policy, it is not uncommon for pass-throughs to be viewed as small businesses and for corporations to be viewed as large businesses. This report uses 2011 U.S. Census data to investigate how the size of businesses varies by legal form (corporate versus pass-through). Firm size is based on employment. The analysis finds that 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). Thus, when using an employment-based measure of size, the majority of all businesses can be considered small, with the exact share depending on the chosen definition of small.

Analysis of the data also reveals that while the majority of firms were small, the largest firms accounted for the majority of employment. Slightly more than 50% of all employees worked at firms (corporate and pass-through) with 500 or more employees in 2011. Looking at this statistic separately for corporations and pass-throughs, roughly 73% of corporate employees worked at firms with more than 500 employees, while about 24% of pass-through employees worked at firms with more than 500 employees. Thus, while a greater proportion of workers in the corporate sector were employed by the largest firms, the proportion of pass-through employees employed at the largest firms was not small.

The average number of employees at large firms (more than 500 employees) is computed to gain insight into how large the largest firms were in 2011. There was a substantial difference in the average number of employees at large firms that were corporations as opposed to pass-throughs in 2011. The average number of employees at the largest C corporations (500 or more employees) was just above 4,000, while the average number of employees for pass-throughs was just over 1,000. Among large pass-throughs, partnerships tended to have the most employees on average with 1,156, S-corporations fall in the middle with 1,041 employees on average, and sole proprietorships have the fewest with 876 employees on average.

Understanding the data presented in this report may help policymakers when considering tax and non-tax policies. Specifically, it may help to better target policies that are geared toward affecting businesses of a particular size.

— Joe

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