Source: Create from data from the IRS Statistics of Income
Here’s some sobering news for those people thinking of going into business for themselves. The average revenues of sole proprietorships has been trending downward for the last 50 years!
As the figure above shows, the average receipts per U.S. sole proprietorship has dropped by two-thirds in inflation-adjusted terms since 1966. Because three quarters of all U.S. businesses are sole proprietorships, this trend is not good for small business.
Revenues at the average sole proprietorship appear to be dropping because their numbers have been growing rapidly. The count of proprietorships has been increasing faster than the population for several decades, driving up the per capita number. In 1957 there were 4.6 sole proprietors per 100 Americans; in 2010 there were 7.5.
In 2010, revenues from sole proprietorships were very similar to what they were in 1957 – down only 5.3 percent in inflation-adjusted terms. Relatively constant revenues are being spread across more and more businesses, it appears.
The increase in the per capita number of sole proprietorships – and the corresponding decline in the revenues of each – is troubling because of what this decline is correlated with: a drop in new employer firm formation.
Between 1977 (when employer firm formation figures are first available) and 2010 (when the latest recent sole proprietorship numbers can be found), the new business creation rate and the average revenues of a sole proprietorship correlate 0.75 – a correlation of 1.00 means that two numbers move in perfect concert. As the revenue of the average sole proprietorship has trended downward so too has the per capita rate of new employer business creation.
While correlation does not imply causation, the sizable decline in both measures should prompt policy makers to ask what’s going on. From 1977 to 2010, the per capita rate of new employer firm formation declined by 50 percent and real revenues at the average sole proprietorship dropped by 58 percent.
Other forms of business don’t appear to be making up for the decline in the average revenues of sole proprietorships. A similar decline appears to be present with corporations. Between 1977 and 2009 – the latest year for which data on corporations are available – the number of corporations increased by 159 percent. Over the same period, the inflation-adjusted revenue of the average corporation dropped by 36 percent.
While much more detailed investigation would be necessary before drawing any firm conclusions, the data suggests that rapid growth in the number sole proprietorships over the past 50 years might not be as beneficial as it appears at first glance.
“Other forms of business don’t appear to be making up for the decline in the average revenues of sole proprietorships.” During the time period in question, LLCs went from being non-existent to being the dominant type of new business formed in the United States. I rarely find a business of any size being operated as a sole proprietor. Even many one-person businesses choose to form an LLC for its flexibility and protection from liability. Unless the analysis includes LLCs, any conclusion drawn from the drop in revenues by sole proprietorships is suspect.
David makes a good point. How are one-person LLCs, S-corps & C-corps being counted?
It just shows that independent and small businesses will really have a hard time competing against all those big companies with lots of investor backup. I hope the government will implement some policies to aid these people.
Wow, a very interesting article. Makes the case for sole proprietor startups to be more concerned with building an enterprise than just making a modest living.
Quite an eye opener; the data is pretty much describing what my fellow independent business owners often said to me – things are more challenging today than several years ago.
Clients expect top notch services at lower fees – “thanks” to the rising number of competitors trying to grab their shares of the market pie… and the rising business operational costs isn’t helping, either.
But hey – knowing the numbers mean we now know what to do; mainly seeking opportunities which I believe still aplenty out there, IMO.
Scott, great analysis of the data. I don’t come to the same conclusions, though. The reality of the workforce is much different from the 50s or 70s: more people are ‘income-patching’; there is greater access to information; many of these processes are streamlined and readily accessible to the public. What this means is that more people who years ago would not have been on the radar for studies such as this now are on the radar, even if their sole prop isn’t their full income-generating activity. Further, as our culture further nurtures the recognition of the individual (over a community), it’s not surprising that fewer new employer firms are beginning – people are working for themselves. The threat of litigation also further discourages formation of sole props, so most people are forming at least LLCs for protection.
Thanks for making me think, Scott!
I beg to differ as I am working in a sole proprietor company for a friend locally and business is quite good after all these years. You have to create a fully functional web site to create buzz and convince customers of your products and services.
By uploading the completed projects on the company web site, potential clients are more likely to trust you and give you down payment to confirm.
Sole proprietary revenue is simply the numerator. The denominator is the host of individuals forced into self-employment caused by government over-regulation in their regular “day-jobs”. When the denominator of responsible individuals – those who choose to carry their own water- super-cedes sole proprietary opportunity, the slope is < 0.