4 ms·

What the literature says about the earnings of entrepreneurs (2016)

51 points by brahmwg 9y ago

nnknninin 9y ago
Prosperity gospel strikes again.
robertwiblin 9y ago
I contributed to this research - interested to hear your thoughts!
- Tomminn 9y ago
  Aren't you worried that incorporation is a consequence of successful entrepreneurship rather than a predictor?
  - BenjaminTodd 9y ago
    Yes - they try to address that in the paper, but it's hard.
  - rgbrenner 9y ago
    That's exactly the flaw with this entire blog post. All of the conclusions are a waste of time... Of course they show those results, when you make a mistake this big.
  - maxxxxx 9y ago
    Totally agree. You need a certain level of money to deal with incorporation. Then it makes sense but you first need to make that money. You may as well have gone with price of people's cars and concluded that it's best to buy a Porsche if you want to be successful.
  - graeme 9y ago
    Main point I was thinking of. I'm self-employed, and my business is growing. Once I reach a certain income level, I will incorporate. Before that point, the legal and time costs aren't worth it. But, this stuck out as something worthy of more study: >The average incorporated self-employed person is highly able – they did well on aptitude tests like the SAT, they have high self-esteem, and were successful in salaried employment, earning more than other workers with similar characteristics. There could be a subset of the self-employed that is basically "soon to be incorporated", which is the group I believe myself to be in. In my case, my salaried peer group are graduates of one of the top Canadian law schools. My default non-business option would have been a high salary; I only did business because I thought I could get something comparable, but with more freedom. You might be able to use the common traits among the incorporated to do further analysis within the self-employed group.
    - kanwisher 9y ago
      Not sure in Canada, but in US you can incorporate same day in most states. You literally goto an office and stand in line behind plumbers and other contract works for 20min, fill one form and your done. Even turbo tax can ha dale basic business taxes so this is not a problem either
      - graeme 9y ago
        Are they counting LLC as incorporated? That would significantly change the US situation. My understanding is that LLC is very similar to sole proprietorship in Canada, but with limited liability added in. My comment may be invalid then. Canada has no such structure, so incorporation is a big threshold. You can still do it easily, but it adds a lot of accounting and admin work.
- quanticle 9y ago
  I would be interested to see whether the increase in earnings was also accompanied by a proportional increase in risk. That is, are entrepreneurs also more likely to declare personal bankruptcy than non-entrepreneurs? Every story I've heard of a wildly successful startup has included the founder taking on personal debt to fund the company rather than letting the company die. This, anecdotally, seems to indicate that founders are, in general, less risk averse and thus enjoy greater average returns.
- michaelw 9y ago
  I didn't see anything about the many benefits that are not typically considered income by the IRS. Most notably, health insurance represents a significant extra cost that makes that 18% advantage look a little smaller. Add in 401K retirement matching and factor in the increased risk and the advantage probably goes away.
  - kanwisher 9y ago
    In the US business owners can contribute far more tax free to their 401k up to $50k a year. This and other tax writeoffs can skew in favor of a small business greatly over a job. However I agree most people aren't able to do the small business
- cjlars 9y ago
  I realize you may not have been able to get the data, but I think the more important distinction isn't the LLC / no LLC separation, but the employee / no employee distinction. Deciding to hire someone is a big marker that shows the difference between someone who is trying to build a business (an entrepreneur) and someone who is plying their trade.
deleted 9y ago
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deleted 9y ago
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arikrak 9y ago
> This study is evidence that if your aim is to make more money, switching from salaried work to running an incorporated business is typically rewarded with a significant boost in earnings. What about survivorship bias? I.e. most entrepreneurs fail, so you get a skewed sample when looking at existing entrepreneurs. Also while it might be easier to just analyze two categories (incorporated vs. not), really one should break down entrepreneurial ventures into at least three categories: - self-employed / contractor (from baby sitter to software consultant) - small business (e.g. restaurant) - startup (seeking to become large company)
- BenjaminTodd 9y ago
  They look at people who switch into entrepreneurship, and then consider the whole sample, so I don't think survivorship bias is a big issue. I agree it would be good to go more fine grained in the categories though.
jcrben 9y ago
Published early 2016. The author wrote this in a comment https://80000hours.org/2016/02/what-the-literature-says-about-the-earnings-of-entrepreneurs/#comment-2524811609 https://80000hours.org/2016/02/what-the-literature-says-abou...: > You're right. This data doesn't tell us much about the earnings of startup founders. We'll be going to that in a later post. > This post is just about self-employment on average. Is that post available somewhere?
troydavis 9y ago
Here's the full version of the study that this article mostly describes, "Smart and Illicit: Who Becomes an Entrepreneur and Do They Earn More?": http://www.nber.org/papers/w19276.pdf http://www.nber.org/papers/w19276.pdf (via https://news.ycombinator.com/item?id=15006502 https://news.ycombinator.com/item?id=15006502):

51 points by brahmwg 9y ago

nnknninin 9y ago

Prosperity gospel strikes again.

robertwiblin 9y ago

I contributed to this research - interested to hear your thoughts!

Tomminn 9y ago
Aren't you worried that incorporation is a consequence of successful entrepreneurship rather than a predictor?
- BenjaminTodd 9y ago
  Yes - they try to address that in the paper, but it's hard.
- rgbrenner 9y ago
  That's exactly the flaw with this entire blog post. All of the conclusions are a waste of time... Of course they show those results, when you make a mistake this big.
- maxxxxx 9y ago
  Totally agree. You need a certain level of money to deal with incorporation. Then it makes sense but you first need to make that money. You may as well have gone with price of people's cars and concluded that it's best to buy a Porsche if you want to be successful.
- graeme 9y ago
  Main point I was thinking of. I'm self-employed, and my business is growing. Once I reach a certain income level, I will incorporate. Before that point, the legal and time costs aren't worth it. But, this stuck out as something worthy of more study: >The average incorporated self-employed person is highly able – they did well on aptitude tests like the SAT, they have high self-esteem, and were successful in salaried employment, earning more than other workers with similar characteristics. There could be a subset of the self-employed that is basically "soon to be incorporated", which is the group I believe myself to be in. In my case, my salaried peer group are graduates of one of the top Canadian law schools. My default non-business option would have been a high salary; I only did business because I thought I could get something comparable, but with more freedom. You might be able to use the common traits among the incorporated to do further analysis within the self-employed group.
  - kanwisher 9y ago
    Not sure in Canada, but in US you can incorporate same day in most states. You literally goto an office and stand in line behind plumbers and other contract works for 20min, fill one form and your done. Even turbo tax can ha dale basic business taxes so this is not a problem either
    - graeme 9y ago
      Are they counting LLC as incorporated? That would significantly change the US situation. My understanding is that LLC is very similar to sole proprietorship in Canada, but with limited liability added in. My comment may be invalid then. Canada has no such structure, so incorporation is a big threshold. You can still do it easily, but it adds a lot of accounting and admin work.
quanticle 9y ago
I would be interested to see whether the increase in earnings was also accompanied by a proportional increase in risk. That is, are entrepreneurs also more likely to declare personal bankruptcy than non-entrepreneurs? Every story I've heard of a wildly successful startup has included the founder taking on personal debt to fund the company rather than letting the company die. This, anecdotally, seems to indicate that founders are, in general, less risk averse and thus enjoy greater average returns.
michaelw 9y ago
I didn't see anything about the many benefits that are not typically considered income by the IRS. Most notably, health insurance represents a significant extra cost that makes that 18% advantage look a little smaller. Add in 401K retirement matching and factor in the increased risk and the advantage probably goes away.
- kanwisher 9y ago
  In the US business owners can contribute far more tax free to their 401k up to $50k a year. This and other tax writeoffs can skew in favor of a small business greatly over a job. However I agree most people aren't able to do the small business
cjlars 9y ago
I realize you may not have been able to get the data, but I think the more important distinction isn't the LLC / no LLC separation, but the employee / no employee distinction. Deciding to hire someone is a big marker that shows the difference between someone who is trying to build a business (an entrepreneur) and someone who is plying their trade.

deleted 9y ago

[deleted]

deleted 9y ago

[deleted]

arikrak 9y ago

> This study is evidence that if your aim is to make more money, switching from salaried work to running an incorporated business is typically rewarded with a significant boost in earnings. What about survivorship bias? I.e. most entrepreneurs fail, so you get a skewed sample when looking at existing entrepreneurs. Also while it might be easier to just analyze two categories (incorporated vs. not), really one should break down entrepreneurial ventures into at least three categories: - self-employed / contractor (from baby sitter to software consultant) - small business (e.g. restaurant) - startup (seeking to become large company)

BenjaminTodd 9y ago
They look at people who switch into entrepreneurship, and then consider the whole sample, so I don't think survivorship bias is a big issue. I agree it would be good to go more fine grained in the categories though.

jcrben 9y ago

Published early 2016. The author wrote this in a comment https://80000hours.org/2016/02/what-the-literature-says-about-the-earnings-of-entrepreneurs/#comment-2524811609 https://80000hours.org/2016/02/what-the-literature-says-abou...: > You're right. This data doesn't tell us much about the earnings of startup founders. We'll be going to that in a later post. > This post is just about self-employment on average. Is that post available somewhere?

troydavis 9y ago

Here's the full version of the study that this article mostly describes, "Smart and Illicit: Who Becomes an Entrepreneur and Do They Earn More?": http://www.nber.org/papers/w19276.pdf http://www.nber.org/papers/w19276.pdf (via https://news.ycombinator.com/item?id=15006502 https://news.ycombinator.com/item?id=15006502):