By DANIEL TAUB

Staff Reporter

An estimated 52,150 California businesses incorporated in 1997 the most this decade and an increase of 6.2 percent over 1996 levels.

More than 40 percent of the incorporations were in Los Angeles County, which posted a 2.7 percent increase over the year-earlier figures, according to CDB Infotek, a Santa Ana-based public records database service.

“The California economy has really turned around in just about all areas,” said Fred Main, vice president of the California Chamber of Commerce. “We’re creating companies, which are then creating jobs.”

Main and others attribute much of the gains to the growth of small businesses particularly here. Although L.A. County only represents about 30 percent of the state economy, it accounted for 40.7 percent of the incorporations in 1997.

“This is very, very good news,” said Jack Kyser, chief economist with the Economic Development Corp. of Los Angeles County. “If you are looking for small business, we know that California, but especially Los Angeles County, is a hot market to be in.”

L.A. County had 33.7 percent more new incorporations in 1997 than it did in 1991, the worst year for incorporations in the ’90s.

In both L.A. County and statewide, the numbers had increased every year since 1991, except for 1995 when the state dipped 1.7 percent, and the county stayed flat.

“I think that the numbers track pretty well with the economy with the business cycle,” said Bruce DeVine, chief economist with the Southern California Association of Governments. “The biggest drop for the region was in 1991, when the recession began, and the biggest increase was last year.”

A business typically files articles of incorporation with the state when it has become large enough that its owner or owners want the business to be able to own property, incur debts and file lawsuits on its own.

Incorporation also limits the owners’ liability, so they can only lose as much money as they have invested in the corporation.

Main said that while the rising number of new incorporations is indicative of an improving economy, there are other factors.

“I think California has made some changes so that it is easier to form small, closely held corporations so that the tax treatment is more suitable,” Main said.

That law, known as the “Subchapter-S Corporate Tax Treatment,” allows a business to incorporate, but still pay taxes as an individual or partnership. As an expansion of that law, which was adopted in 1987, the state income tax for small corporations was lowered from 2.5 percent to 1.2 percent in 1993.

Another factor, Main said, is the large number of people who were laid off from major companies during the recession of the early ’90s.

“People went out and formed businesses as consultants or as others,” Main said, adding that many of those start-ups have now reached the size where they are ready to incorporate.

Not everyone sees new incorporations as a reliable indicator of economic growth.

“One, it doesn’t tell you anything about who went out of business,” said Ted Gibson, chief economist with the state’s Department of Finance. “Secondly, it misses sole proprietorships and partnerships.”

Also, Gibson said, many businesses file “shelf corporations” businesses that are incorporated with the state, but are not used until they are needed by the parent company sometime in the future.

“I don’t know whether we’re seeing Bank of America creating some shelf corporations, or whether we see new companies starting up out there,” he said.

Gibson said a more reliable growth indicator remains the unemployment rate. That rate was 5.7 percent statewide for November 1997, the latest month for which data is available and the lowest in California since June 1990. In L.A. County, the rate was 6 percent for November 1997 also the lowest for the area since June 1990.

By region, the biggest increase in incorporations was in the Central Valley, up 15.8 percent. The Bay Area posted an 8.5 percent increase.

The six counties that make up Southern California L.A., Orange, Riverside, San Bernardino, San Diego, and Ventura had an average increase of 5 percent from 1996 to 1997.

Within L.A. County, parts of the San Fernando Valley did the best in new incorporations. Woodland Hills had a 66.9 percent increase from 1996 to 1997, Sherman Oaks had a 34.1 percent increase and Van Nuys had a 22.2 percent increase.

Other parts of L.A. County did not fare as well. Arcadia had a 20.3 percent drop, and Alhambra had a 19.9 percent drop. Other areas that saw declines include El Monte, Long Beach and Brentwood.

Kyser said that as more small companies form as they have been doing through small-business incubators and home-based businesses the number of new incorporations is likely to increase as well.

“This is the incorporation process, and you have a lot of people still operating out of their homes, who haven’t gone through this step,” Kyser said. “I think you’ll see more strong performance in 1998.”