Establishments Are Less Likely To Fail Than Firms

Since the mid-1980s, the number of U.S. business establishments has grown faster than the number of employer businesses, Census data shows. But this growth comes from higher odds of survival, not from higher rates of formation.

The Census Bureau defines a business as an:

“Organization consisting of one or more domestic establishments that were specified under common ownership or control.”

As establishment is “a single physical location where business is conducted or where services or industrial operations are performed.”  As Census explains, “the firm and the establishment are the same for single-establishment firms”, but differ for multi-establishment businesses.

The figure below shows the number of establishments and firms as a percentage of their 1977 level. As you can see, the gap between establishments and firms has widened since the mid-1980s, including during the recent downturn and weak recovery when the number of both has slipped.

In 2010, there were 33 percent more establishments than employer businesses. Back in 1977, there were only 22 percent more.

Source: Created from data from the Census Bureau’s Business Dynamics Statistics

This gap comes from a lower rate of failure for establishments than employer businesses. The difference in start-up rates has actually shrunk over time. In 1977 the ratio of new establishment starts to new employer business starts was 1.1 to 1. But by 2010, the amounts were virtually the same, with only 1.7 percent more establishments than companies being formed.

The twitter-length message for entrepreneurs here is that, over the past 25 years, individual outlets of multi-unit chains have become less vulnerable to failure than independent businesses.

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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.