We examine the effect of incorporation in stimulating small business investment. Exploring a 2006 UK tax reform that lowered the tax gain to incorporation and reduced the after-tax internal funds for small companies, we present three main results. First, a one-percentage-point reduction in the tax gain decreased the number of new incorporations by 4.5 percent. Second, on average, a £1 reduction in the post-tax internal funds of newly-incorporated firms would reduce their investment by 90 pence, consistent with them facing severe financial constraints. Third, this impact on investment gradually diminished after incorporation, consistent with incorporation improving access to external finance.
