Barbara’s Blog

How big is small business? Is entrepreneurship on the ascendency?

There is much conflicting information in the media. Here are some of the facts from or based on government sources:

All businesses in the U.S.

The Joint Committee on Taxation’s report on choice of entity found that the “vast majority” of businesses in the U.S. are sole proprietorships, with more than 22.6 million non-farm sole proprietorships in 2009 out of 33.6 million total business returns.

There were:

• 1.7 million C corporations (some of which are mega-public companies)
• 1.9 million farms
• 3.1 million partnerships (which includes limited liability companies)
• 4.1 million S corporations

The number of pass-through entities (businesses structured so that profits and losses are taxed on owners’ personal returns) has nearly tripled since 1987.

Startups

The SBA says that from 2007 to 2010, the rate of startups declined by 12%. In 2008, the startup rate fell below 3% in a quarter (compared with the previous quarter) for the first since tracking began in the 1990s. The latest startup rate for which data is available is 2.7% in the second quarter of 2011.

A Kauffman Foundation report found that new firms (less than five years old) were 35% of all companies in 2010 as compared with 49% in 1982.

States with the best business climates:

• Small Business & Entrepreneurship Council Report found that South Dakota, Nevada, Texas, Wyoming, and South Carolina were the top five locations.
• The Tax Foundation Report found that Wyoming, South Dakota, Nevada, Alaska, and Florida were the top five locations.

Bankruptcies

It appears that bankruptcy filings in federal court are on the wane. According to court statistics, there were 13% fewer filings for the 12-month period ending March 31, 2012, as compared with the previous 12-month period.

Comment on the numbers

Like a Georges Seurat painting, statistics create the broad picture of the state of business today. However, each little dot in the picture is a unique entity on which an owner has pinned his or her hopes, dreams, and financial resources.

Anecdotal stories that I hear from entrepreneurs around the country continue to show three main themes: strong desires to start a business, continued struggles to keep a company going, and, unfortunately, failures (folding a company, selling out, or going into bankruptcy).  There’s no single statistic that can capture the state of small business today.

The U.S. Small Business Administration (SBA) releases quarterly statistics on business churn. What is this and why should you care about it? Business churn is defined as changes in the number of births and deaths of firms in this country. When business births (startups) increase and business deaths decline, the resulting rise in the number as business churn is good. “Business churn is needed to keep the economy from stagnating,” says the SBA.

Business births are vital for employment creation. The government says that small firms (20-499 employees) were responsible for three-quarters of job creation from the end of the economic downturn (from 2009 on). However, now (since 2011) even smaller firms (1-19 employees) are creating jobs.

Business bankruptcies—one of the ways in which businesses die—are on the decline for firms of all sizes. In the last quarter of 2011, there were 11,149 bankruptcies. In the first quarter of this year, there were only 10,998, showing that business deaths are on the decline.

Clearly, things are moving in the right direction. However, we are nowhere near pre-recession numbers in business creation. The number of unincorporated businesses created in 2011 is markedly below the number in previous years: 10,586,000 in 2006, 10,413,000 in 2007, 10,080,000 in 2008, 9,831,000 in 2009, 9,681,000 in 2010, and only 9,449,000 in 2011. It’s too early to pop the cork and celebrate the return of a strong economy, despite the statistical rise in business churn.

Word on the street (from small business owners I know) is that they are largely still just hanging on. They aren’t expanding. They aren’t hiring. They aren’t buying new equipment (other than what is absolutely necessary). There are “for rent” signs everywhere, with store fronts and office space showing significant vacancies. My personal view on business churn is not as rosy as the SBA’s, but I sure hope things change real soon!