The Rise of the Partnership economy
2015.01.10
Rev.3
Jun Saito
1
Gist
You can lead a horse to water, but you
cannot make him drink.
You can give him a tax incentive, but
you cannot make him do an innovation.
2
May I be excused first?
3
In the 13th century, Thomas Aquinas recognized:
"Now, a private society is one which is formed
for the purpose of carrying out private objects;
as when two or three enter into partnership
with the view of trading in common.“
Contra impugnantes Dei cultum et religionem, Part 2, ch. 8 (Opera omnia, ed.
Vives, Vol. 29, p. 16).
Cited in 1891 Vatican by Leo XIII encyclical Rerum Novarum paragraph 51.
4
Private, Public
Japanese Society
Western Society
Public
State = Public
Non-State
State
(Church)
People = Private
People
5
Revival
The Rise of the Partnership economy
2015.01.10
Jun Saito
6
Abstract
U.S.A.-IRS-SOI Integrated Business Database (IBD) has been developed to
provide evidence that businesses do, in fact, pursue optimal organizational structures. They have
conducted a big-data calculation on vast tax return data which have been filed by whole business
entities from 1980 through 2008. The main conclusion is:
The share of all net income generated by flow-through businesses has more than doubled since the
early 1980s; the flow-through share of net income grew from 20 percent in 1980 to 60 percent by
2008.
We can reword flow-through into partnership and non-flow-through into corporate. So, we can say in
other words, the fall of corporate business and the rise of partnership business have remarkably
happened in the past of about thirty years.
The question is “Why? Why it has happened?” To look for the answer, the author will show
differences between corporate and partnership. Let us discuss them and find the answer. My favorite
answer is: Difference in Motivation, I mean:
A partnership is more self-motivated They produce goods and services which they want and like. A
corporate, however, is motivated by others’ demand, namely money or profit. They want money
or profit, more than what they produce.
7
The flow-through share of net income grew from 20 percent in 1980 to 60 percent by 2008
Data Source： Internal Revenue Service, Statistics of Income, Integrated Business Data, www.irs.gov/taxstats/bustaxstats/
100%
Shares of US All Business Net Income
90%
80%
corporate tax entity
70%
60%
50%
40%
30%
flow through entity
20%
10%
0%
1980
Net Income = 0.3 trillion $
Net Income
= 3 trillion $
1985
1990
1995
2000
2008
2005
8
Number of LLC and C-Corp （1992-2011）
Data Source: http://www.irs.gov/uac/SOI-Tax-Stats-Integrated-Business-Data and http://www.irs.gov/uac/Tax-Stats-2
2,500,000
2,000,000
1,500,000
1,000,000
LLC : the most popular partnership
C-Corp : the most popular corporate
500,000
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
9
2011
Differences between Corporate and Partnership
Corporate
rev.7
No.
Item
1
capacity
2
liability in default
limited liability
3
going concern or not
going concern
not-going concern,
term company or at-will company
4
accounting
mandatory accrual accounting
freedom of accounting.
However, collectively proper incomes shall be
distributed to the partners.
5
Who has the power
to recognize taxable
income?
the state, the tax authority.
In tax accounting, the statutory useful life of
depreciable assets are legally set. So, the
depreciation costs are automatically accrued
by rule.
the partners. (So, a tax sheltering is possible.)
But for collectively proper accounting, the state
should judge the tax shelter abusive. In other
words, a tax sheltering is recognized lawful
when the activity has economic substance.
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pass through or not
not pass through.
The state levy tax both on corporate income
and on dividends to shareholders.
(double taxation)
pass through.
A partnership shall file the information return
to the tax authority about the annual income. In
the dissolution, the partners shall liquidate the
partnership and shall separately pay taxes on
the finally distributed incomes. (single taxation)
7
share transferability
freely transferable
transferable
8
What are the contributions
and distributions in?
in cash or cashable property
collectively in kind
9
purpose of company
profit.
motivated by demands of people at large.
economic substance.
motivated by the partners’ own demand.
10
collaboration type
ownership
entity
contract
entity
courts
accessible
entity
Partnership
accounting
entity
ownership
entity
contract
entity
courts
accessible
entity
accounting
aggregate
limited liability by at-risk amount(*)
The net asset in balance sheet is the solvency margin.
arm’s length
(*)；1)
cash contributed to partnership, 2) adjusted basis of
contributed asset, 3) partner’s personally pledged amount
non-arm’s length, closely held company
10
Lawful tax shelter
Supreme Court of the United States,
1935
• For a business reorganization to affect tax
liability, the reorganization must have
economic substance, not be merely an
attempt to reduce tax.
• However, "the legal right of a taxpayer to
decrease the amount of what otherwise
would be his taxes, or altogether avoid them,
by means which the law permits, cannot be
doubted".
A pronouncement decided in the case: Gregory v. Helvering, 1935
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But, a mere tax shelter is harmful to social economy,
because…
offset deduction
12
Self-motivated things to do
are important.
You can lead a horse to water, but you
cannot make him drink.
You can give him a tax incentive, but you
cannot make him do an innovation.
13
Cost Effectiveness (Net Income/Cost)
14.00%
Data Source : IRS-SOI-IBD Table 1 www.irs.gov/file_source/pub/irs-soi/80ot1all.xls）
12.00%
Partnership（除く個人事業）
Corporate
10.00%
So, what has happened in 1991? Collapse of Soviet Union?
8.00%
Bill Clinton administration
6.00%
4.00%
1996, Check the Box rule:
A business entity that is not per se corporation is
classified as a partnership for federal tax purposes,
unless an election is made for the entity to be
classified as a corporation. (default = partnership)
2.00%
0.00%
1980
1985
1990
1995
2000
2005
-2.00%
14
1986, PAL rule: Passive activity loss can be offset only by passive activity gain.
So, what has happened in 1991?
• Information Technology revolution?
Indeed, it has
begun about 1991.
• But, also in Japan it has happened. Still, Japan…
15
Non-K.K.K.K.:are
2-digit
less
than
K.K.
Japanese most popular corporate
Number of Japanese Company (1999-2013）
10,000,000
Data; Ministry of Justice in Japan, http://www.moj.go.jp/TOUKEI/ichiran/touki.html
1,000,000
100,000
10,000
1,000
100
10
1
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
K.K.
1,212,50 1,191,68 1,235,72 1,171,11 1,310,52 1,210,01 1,215,01 1,369,95 1,250,51 1,055,54 992,293 931,967 920,328 903,080 897,675
Yu-Gen
386,486 413,519 420,626 431,879 449,401 470,455 475,298 452,389 374,410 331,056 293,880 270,191 241,143 233,601 219,568
Go-Do(J-LLC)
4,066
9,557
10,785 13,667 15,772 18,756 23,025 29,836
Go-Shi
8,367
9,830
10,397 10,495 10,345
9,977
9,625
7,933
7,933
6,999
6,056
5,473
5,009
4,799
4,425
J-LLP
366
1,781
1,725
1,715
1,650
1,540
1,537
1,458
1,378
Go-Mei
1,463
1,521
1,507
1,484
1,538
1,567
1,369
1,442
1,326
1,210
1,066
1,088
946
941
1,002
16
Again, what has happened in 1991?
• My guess:
Some drastic change in social thought?
like…
17
Dignity is prior to Justice
It doesn’t mean selfishness is prior to fairness.
• Even prior to the logic of a fair exchange of
goods and the forms of justice appropriate to
it, there exists something which is due to man
because he is man, by reason of his lofty
dignity. Inseparable from that required
"something" is the possibility to survive and,
at the same time, to make an active
contribution to the common good of humanity.
1991 Vatican Encyclical Centesimus Annus paragraph 34
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New Priority of Norms
19
Origin of Innovation
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Let us discuss.
Thank you.
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Hereafters are O-MA-KE.
22
In the first, Microsoft,
YouTube, Facebook,
and
etc.
had
1976, partnership 2001, LLC
2005, LLC
startuped in partnership tax entity.
Transition of founder
funder in monetary economy
gain
←
Time
→
0
loss
Transition of firm form in object economy
Partnership
Nonlisted
Listed
Time
Investments could be easily compensated for by tax.
Death Valley
Darwin’s Ocean
(vulnerable to sudden death)
Corporate
Devil’s River
Secular world
23
Partnership
Investments could be easily
compensated for by tax sheltering.