This paper presents a tax-based model of an entrepreneurial firm's capital
structure choice problem, exposing the relevance of non-transferable tax
deductions, "at risk" loss limitation, and related asymmetries in
entrepreneurs' and investors' ability to exploit tax shields. While naive
application of tax-based corporate capital structure theories implies all-equity
financing of a closely-held enterprise, this analysis finds circumstances under
which debt financing can be optimal.
