Business Creation, Incorporation, and the Role of Personal Bankruptcy Protection: Evidence from the BAPCPA

Abstract

This paper investigates how business creation, earnings, and survival are related to incorporation and personal bankruptcy codes. In theory, individual debtor protection might either affect entrepreneurship or just prevent the incorporation of household firms. To examine this issue, I exploit the bankruptcy reform of 2005 as an exogenous reduction in the protection granted by homestead exemptions. Generous exemptions are found to encourage low-skilled entrepreneurs to sustain unincorporated firms. However, these exemptions also encourage high-skilled entrepreneurs to undertake profitable ventures. The evidence is consistent with new entrepreneurs often relying on unincorporated forms as the stepping-stone to a successful business.