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How Sole Proprietors Responded to the Great Recession and Weak Recovery



great recession

Sole proprietors were hit hard by the Great Recession. In 2008, the number of sole proprietorships in the country declined by 508,000, after having increased in every year since 1980.

Sales tanked. Revenues at the average Schedule-C-filer fell 11.2 percent from 2007 to 2009 in inflation-adjusted terms, Internal Revenue Service (IRS) statistics reveal.

Proprietors cushioned the effect of the sales decline on their own pockets by reducing expenses. On average, they reduced their deductions by 11.3 percent in real terms, examination of IRS statistics show. The result was a lesser decline in net income than in revenues, which fell 8.6 percent at the average sole proprietor between 2007 and 2009.

Cost of goods sold was a big part of the place where sole proprietors cut their expenses during the economic downturn because cost of goods sold accounts for four tenths of all business deductions at sole proprietorships, IRS statistics reveal. During the Great Recession, sole proprietors cut their cost of goods sold by 14.1 percent in inflation-adjusted terms. In particular, the average sole proprietorship reduced its spending on materials and supplies by 26.7 percent, the cost of labor by 20.5 percent, and other costs by 15.5 percent in real terms.

The average Schedule C filer also made big reductions in inflation-adjusted deductions for commissions, (20 percent) interest expense (17.4 percent), travel (14.7 percent), advertising (14.2 percent), office expenses (12.6 percent), and repairs (12.0 percent). Depreciation (down 13.6 percent) also declined significantly in real terms.

Other expenses declined less. Deductions for car and truck expenses, employee benefit programs, legal and professional services, meals and entertainment, pension and profit-sharing plans, business use of the home, utilities, net salaries and wages not elsewhere deducted, supplies, and rent, all went down less than the overall decline in deductions.

Beginning of the year inventory was the only deduction on the consolidated sole proprietorship returns for the economy that increased in real terms between 2007 and 2009, the IRS’s figures show.

Sole proprietorships recovered slightly in the first two years since the end of the Great Recession. The number of Schedule C filings increased by 767,000 between 2009 and 2011 (the latest year data are available). However, revenues at the average sole proprietor fell 1.2 percent in inflation-adjusted terms over the period.

Sole proprietors kept a lid on spending during the early part of the recovery, leading deductions to decline 3.1 percent in real terms between 2009 and 2011. These cuts allowed the average sole proprietor to squeeze out a 0.4 percent in net income in inflation-adjusted terms.

The larger reductions in sole proprietors’ expenses in the early part of the recovery were primarily outside of cost of goods sold, with deductions in that category falling by only 1.1 percent in real terms over the two year period. However, deductions for some components declined by more than the overall level. Most notably, beginning of the year inventory fell 16.4 percent; end of the year inventory decreased 16.1 percent; and the cost of labor went down 6.5 percent in real terms between 2009 and 2011.

Other real term declines in deductions over the 2009 to 2011 period were: advertising, 9.4 percent; pension and profit sharing plans, 17.4 percent; employee benefit programs, 5.4 percent; insurance, 10.6 percent; interest paid, 24.0 percent; office expenses, 9.0 percent; rent paid, 3.2 percent; and net salaries and wages not elsewhere deducted, 4.4 percent. Depreciation (down 5.2 percent) also declined by more than the overall reduction when measured in inflation-adjusted terms, though it fell by less than it did during the Great Recession.

Other deductions followed a different pattern. Commissions; legal and professional services; purchases; other costs; materials and supplies; car and truck expenses; meals and entertainment; travel; utilities; and repairs, all either decreased by less than the overall amount, didn’t change, or actually increased in inflation-adjusted terms between 2009 and 2011.

Recession Photo via Shutterstock

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

4 Reactions
  1. Sole proprietors survived by tightening the belt in any way they could and even when the recovery began in economists minds, they were still very conservative. Makes a lot of sense to me.

  2. Very encouraging article, it is true that sole proprietors have acted smartly when then situation was genuinely critical in every respect. I believe these leanings can actually help in easing financial troubles from future point of view.

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    A interesting article about Sole Proprietors

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