A MODEL OF CHOICE OF BUSINESS ENTITY USING DISCRIMINANT ANALYSIS

This research uses multilinear discriminant analysis to examine the factors, cues, or independent variables that lawyers and accountants, as professional advisors, use when assisting clients in the choice of business entity.;A lawyer or accountant recalled past choices made in conjunction with clients. This advisor then rated the importance, on an eight point scale, of twenty-seven factors. These factors consisted of both legal and tax considerations. These ratings were compared to the entity choice actually made in that case.;The format of this research is very similar to the analysis of background psychological factors in the diagnosis of various psychopathic disorders.;The results of this research show that entity choice can be predicted quite accurately based upon these twenty-seven variables. Lachenbruch U (jackknife) taus of over seventy-five percent for the full dimension model were obtained.;The four business entity forms discussed are proprietorships, partnerships, S corporations, and C corporations.;Good results could still be obtained with substantially fewer variables. Both reduced number of function and variable models were examined.;The decision models of lawyers were compared to those of accountants. The results indicate a substantial difference in the decision process of the two groups.;The results show an emphasis upon "short term" factors, those factors which provide immediate returns. Three key legal factors and six key tax factors dominate the decision process.;The results are displayed in graphs as well as table form. Stretched vector and entity choice graphs of the dominant variables are provided for the unrotated total advisor group; as well as rotated graphs for the total advisor group, lawyers, and accountants.;Several suggestions for future extensions of the study of entity choice, the use of discriminant analysis in tax research, and in graphing methodology are given.;A small summary of the potential impacts of the Tax Reform Act of 1986 on this research is also provided.