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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 [1]

The report, The Impact of Regulatory Costs on Small Firms [2], 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 [3] website.