Barbara’s Blog

There are many reasons to give thanks on Thanksgiving. From a business owner’s point of view, there are some special reasons to remember.

The U.S. is (almost) the best country in which to start a business
According to a September 2010 report by the SBA’s Office of Advocacy, the U.S. ranks third (after Denmark and Canada) as the best place in the world to start a business.

The report measured entrepreneurial performance in 71 countries. It should be clarified that the report focused on entrepreneurship, a qualitative phenomenon, versus small business, which is a quantitative activity.

Entrepreneurship will find a solution
Whatever the problem, creative entrepreneurs will solve problems; the profit motive is a great incentive.

Take the case of a local inventor in Colorado who created and is now selling TSA underwear. Passengers concerned about displaying their private parts on airport scanners can be shielded by fig leafs in the special underwear.

Entrepreneurship is a pathway out of poverty
Despite government programs and billions of dollars spent on assistance, one solution to poverty is entrepreneurship.

Take the case of Rwanda, a country devastated by genocide through 1994 that is now a successful emerging market and model to other underdeveloped nations. In a report by SevenFund.org, a virtual non-profit entity run by entrepreneurs whose strategy is to markedly increase the rate of innovation and diffusion of enterprise-based solutions to poverty, the country has experienced average annual growth since 2004 of 8%. The growth is through enterprises.

Making microloans to people in poverty so that they can start businesses continues to be a growing trend. In 2006, Muhammad Yunus, a Bangladeshi economist and his Grameen Bank, won the Nobel Peace Prize for microlending.

According to the State of Microcredit Summit Campaign Program, in 1997 fewer than 8 million families had been served by micro-credit worldwide, but the end of 2004 there were 3,200 micro-credit institutions serving more than 92 million people. While there have been some serious problems with micro-lending, such as unscrupulous collection activities, the concept is still without peer.

If you want to share your good fortune during this holiday season by participating in micro-lending, check out Kiva.

Ten years ago when I started my newsletter, Big Ideas for Small Business®, there were millions of small businesses but little media attention was given to them. Today, small business is big news.

• The Small Business Jobs Act of 2010, signed into law on September 27, 2010, was enacted to provide help to small business (although the reality is that many mid-size and large corporations can benefit from some of the provisions in the Act).
• Just about every candidate for office today is touting the importance of small business to our economy and courting the small business vote.

What is “small business”?
What does small business want? It’s virtually impossible to say because there is no single definition of what constitutes a small business. What matters to a company with 200 employees may be very different from what matters to a mom-and-pop operation with only family members on the payroll.

The definition of small business varies considerably:

Small Business Administration — generally 500 or fewer employees.

IRS — different definitions based on gross receipts, assets, and/or number of employees ranging from 25 employees (for the tax credit for small employer health insurance premiums) to 500 employees (for the DB(k) retirement plan).

Department of Labor — from 2 employees and up, depending on the federal employment law (e.g., with 20 or more employees for COBRA; 50 or more employees for the Family and Medical Leave Act).

How many small businesses are there?
This is impossible to say because it depends on what you count as a small business.

• SBA’s Office of Advocacy estimates 27.5 million in 2009.
• SCORE says 29.6 million in 200
• Census Bureau estimates 6 million firms with employees and 21.4 million without employees for 2009.
• IRS shows 22.6 million nonfarm sole proprietors filed Schedule C in 2008.

There are also many small businesses that are not counted by anyone. They operate in the underground economy, buying and selling but not paying taxes. Some of these businesses are engaged in illegal activities, but the vast majority of underground businesses are simply flying under the radar.

The importance of small business to the economy
According to the latest fact sheet from the SBA’s Office of Advocacy, here are some key facts:

• Employ half of all private sector employees.
• Pay 44% of total U.S. private payroll.
• Generated 65% of net new jobs over the past 17 years.
• Create more than half of the nonfarm private GDP.
• Hire 43% of high tech workers (scientists, engineers, computer programmers, and others).
• Are 52% home-based and 2% franchises.
• Made up 97.5% of all identified exporters and produced 31% of export value in FY 2008 (the government’s fiscal year ending September 30, 2008).
• Produce 13 times more patents per employee than large firms.

The small business conversation
Okay, so small business is important to the economy. But what needs to be done to help small business? The answer depends on which small business you ask.

Let’s work to get a consistent definition so that the needs of companies of a particular size can be met. Perhaps we need several categories, such as micro-businesses (with up to 10 employees), nonemployee firms (freelancers and independent contractors), and a realistic “small” business size (say 100 employees).

Everyone knows George Santayana’s words: “Those who cannot remember the past are condemned to repeat it,” yet few in government seem to heed them.

The SBA Office of Advocacy just released a working paper  entitled “The Role of Small Business in Economic Development of the United States: From the End of the Korean War (1953) to the Present.” Some of the information in the paper and the lessons drawn from them should be required reading for members of Congress and others.

Initiatives to help small business
The importance of small business and initiatives to spur growth were first recognized by the Eisenhower administration with enactment of the Small Business Act in 1953 (which created the Small Business Administration) and the Rural Development Program in 1955.

A famous quote preceding enactment of these small business programs was  “If America will save the small businessmen, the small businessmen will save America.”   The SBA became the first peacetime agency with (as the report says) “a mandate to ‘encourage’ and ‘develop’ small business growth, and to aid minorities and other disadvantaged people in securing loans and learning management techniques.”

Excerpts from the Small Business Act:

“The essence of the American economic system of private enterprise is free competition.”

“Only through full and free competition can free markets, free entry into business, and opportunities for the expression and personal growth initiative and individual judgment be assured.”

“The preservation and expansion of such competition is basic not only to economic well-being but to the security of this Nation.”

Government action
Despite the creation of the SBA and words recognizing the importance of small business, most government resources and attention continued to be focused on large companies. With the enactment of the Small Business Economic Policy Act of 1979, at last there was an avowed national policy to implement and coordinate efforts to expand small business. However, words did not translate into serious action. Only recently has there been a mandate that a certain percentage of government contracts be allocated to small businesses and, what is not said in the report, that this mandate is too often skirted by large corporations masquerading as small businesses.

Some conclusions of the report
Until the 1970s, “America lost a tremendous amount of manpower and economic strength because the economic value of the small business community was not acknowledged and the value of a well trained diversified population was not recognized.” Today, there are about 29 million small businesses that generate about 75% of net job creation.

In 2005 following Hurricane Katrina, it was clear that “policy makers did not understand the pivotal role small businesses play in the local and regional economy…[I]t took a national disaster…to understand why small businesses must participate as full economic partners at all levels of government.”

Certain tax incentives and other federal programs are at least trying to address small business needs. The greater help would come from some fundamental changes in how government operates:  lower taxes, less regulation, and less intrusion into business operations.

A report by the SBA’s Office of Advocacy found that fewer than 2% of small business owners had a Keogh (self-employed) plan and only 18% participated in 401(k) plans.  Only about 36% had IRAs, and just one-third of them made an annual contribution for the 2005 tax year (the most recent year in the report).

What does this say about small business owners?  The report does not indicate the reasons for not contributing, but here are some that I can think of:

1. Owners are unaware of the tax advantages to saving for retirement through qualified plans and IRAs;
2. Owners are cash-short and unable to fund these plans;
3. Owners are too tightfisted to contribute on behalf of employees, something they would have to do in most cases if they wanted to personally benefit from retirement plans;
4. Owners don’t want to bother with the paperwork, investment responsibilities, and other details of having a plan;
5. Owners expect to sell their businesses as a way to create retirement funds.

The report did find that busness owners were more likely to have a retirement account if they were older, non-minority, better educated, and with an established business or more than one business.  The report also learned that being a male busines owner reduced the probability of IRA ownership from 35.6% to 31.2% but increased the probability of having a Keogh or participating in a 401(k) plan from 1.7% to 3.7% and from 17.4% to 20.3%, respectively.

Even though the deadline for setting up a 401(k), profit-sharing, or most other types of qualified retirement plans for 2009 ended on December 31, 2009, if you have not yet filed your income tax return for 2009 and determine that your business was profitable in 2009, you can still create and fund a Simplified Employee Pension (SEP) until the extended due date of your return.  For example, if you are a sole proprietor with a filing extension for your 2009 return, you have until October 15, 2010, to put tax-deductible funds into a SEP for 2009.  Your contribution limit for 2009 is up to $49,000, but your actual contribution depends on your earnings and funds on hand for making the contribution.  If you have employees, you’ll have to contribute to accounts for them.  For details about SEPs and other retirement plans, see IRS Publication 560, Retirement Plans for Small Business.