November 22, 2014

Small Businesses Are Hit Harder by Regulations

A study recently released by the SBA’s Office of Advocacy confirms what small business owners have often felt: Federal regulations place a disproportionate financial burden on entrepreneurs.

Small Businesses are Hit Harder by Regulations

The report, The Impact of Regulatory Costs on Small Firms, assessed the overall cost of federal regulation on small businesses in five major sectors of the U.S. economy: manufacturing, trade (wholesale and retail), services, health care and “other” (all businesses not included in the other five categories).

The report showed that, per employee, small firms spend $2,830 more annually than do larger firms on complying with government regulations.

“That is a 36 percent difference, and that is an unfair burden to place on American small business,” says Winslow Sargeant, Chief Counsel for Advocacy.

On average, regulatory cost per employee for all firms was $8,086 annually. The cost for firms with fewer than 20 employees was $10,585 per employee. For firms with 20-499 employees, the annual cost was $7,454 per employee; and for those with 500 or more employees, the cost was $7,755 per employee.

Drilling down to specific sectors, the report showed that costs are particularly disproportionate in the manufacturing sector. Small manufacturers’ compliance costs per employee are more than double the costs for midsized and large firms.

What specific types of regulations are the most costly? Compliance with environmental regulations costs nearly four times as much in small businesses than in large ones, while the cost of tax compliance is more than twice as high in small firms than in large ones.

The fact that small businesses are bearing an outsize burden isn’t new—previous studies in 1995, 2001 and 2005 found the same result. A slight piece of good news: The current study found that, though the cost of regulatory compliance is rising overall, small businesses’ share of those costs was slightly less disproportionate than in the 2005 study.

Obviously, there is still a lot of unfairness to be addressed when it comes to regulatory compliance. And while many of these regulations have good intentions (the study did not address the value of the regulations), the disproportionate burden that’s falling to small businesses is making it even harder for them to generate more sales and add new jobs.

You can get more information, including specifics about different economic sectors, and a complete copy of the report at the Office of Advocacy website.

10 Comments ▼

Rieva Lesonsky


Rieva Lesonsky Rieva Lesonsky is a staff writer for Small Business Trends covering employment, retail trends and women in business. She is CEO of GrowBiz Media, a media company that helps entrepreneurs start and grow their businesses. Follow her on Google+ and visit her blog, SmallBizDaily, to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.

10 Reactions

  1. Couldn’t agree with you more. SMBs need less government involvement, not more.

  2. I wonder why the government’s making it tough for small businesses to thrive, when in fact entrepreneurs are today’s heroes in a sinking global economy. This will force many to run a totally virtual business that’s far from the shackles of the laws that bind them. This can mean opportunities lost to another developing nation.

  3. It’s not the regulations that are expensive, it’s the manual process of assessing your compliance with the regulations that are really expensive. Keep in a mind that a small supplier has to provide the are compliant repeatedly for each of their customers. Each customer has a different template for their assessment. This is a HUGE waste of time and money.

    I ran into a company that does what is called “shared assessments” to reduce this cost. They perform a single industry-standard assessment (say PCI, BITS, HIPAA, etc). When a company needs to measure their compliance again, the supplier can syndicate the already completed assessment. They are in effect the credit bureau for IT risk assessment. Very simple and cost effective. They–and other companies that follow this type of model–will have a bright future.

    Ryan

  4. Good report that highlights the growing awareness that big business and big politics are in bed with one another to the detriment of small business and local government.

    Tax returns are equally onerous – small businesses have the exact same burden of tax regulations as do the largest businesses. In 2009 Goldman Sachs made $2billion in profit and didn’t pay a red cent in taxes – with $2billion in profit to protect, a few million to pay tax lawyers and CPAs to ensure they don’t pay taxes is well worth it. Meanwhile businesses who did $500,000 last year paid as much as 30% of their gross income and up to 100% of their small profits in taxes.

    Small business (under 20 employees) needs to become fully aware of the big business/big government alliance and we need to all fully understand that regulations almost NEVER hurt big business and ALWAYS hurt small business.

  5. Sorry, but I own a small business and your figures are hogwash! It depends on the business sector, as to the amount of government regulation. This is the meme that gets repeated, but no one ever NAMES the regulations and qualifies the expenses to those regulations! Why not? The claim is a manufactured one to make small businesses appear to be victims of regulation. They are not. If you dispute my assertion, then NAME some regulations that affect all small businesses and attach dollar amounts to those typical regulations. I’m betting that you can’t.

    • Tom, I’m surprised — but assume you must be very new in your business if you are not aware of regulations.

      If you read the study by the SBA’s Office of Advocacy, it answers your assertion. Regulations are real. They span from IRS tax regulations, to state employment regulations, to EPA regulations, to licensing regulations, to zoning regulations, to you name it.

      In my small business we’ve spent 10 hours just in the past month dealing with:

      – a regional taxing authority who wrongly claimed jurisdiction over my business,
      – a state unemployment compensation payment calculation issue
      – navigating the complexities of an SEP vs. a SIMPLE retirement plan.

      Those are all regulations. Even if you recognize that it may be necessary to have regulations for the common good and for the orderly running of government, do we need so darn many of them? And do they have to be so utterly complex? Complexity and layered regulations at multiple governmental levels add to the burden.

      – Anita

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