Entrepreneurial firms’ choice of ownership forms

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Abstract

Being a sole proprietor has few legal requirements, but is inferior to incorporation in terms of obtaining the necessary resources required for firm growth. However, sole proprietorship is the predominant choice for entrepreneurial firms because it allows for quick decision-making and low monitoring cost among investors. We use the World Bank Enterprise Survey and find that sole proprietorship is the most dominant ownership form choice for entrepreneurial firms in emerging economies. This tendency decreases if entrepreneurs have extensive industry experience, threats from competitors in the informal sector are low, or the workforce is sufficiently educated for the labor market. We discuss implications on entrepreneurship in emerging markets.