Small Business, Taxes and Assorted Numbers

You might be a little surprised to see how very little the recession affected the proportions of different-sized businesses. Or you may not … but I was. But the latest research does suggest that, whatever these trends towards smaller firms mean, they don’t seem to be going away.

New Firm Size Data

This month, we had one of my annual favorites: the release of the new firm size class data for 2008.  Overall, the population of U.S. businesses declined from about 27.7 million to 27.2 million, a decline of 476,224 firms or 1.7 percent, after growing by a relatively healthy 3.6 percent between 2006 and 2007. The number of nonemployer firms fell by 1.6 percent, down from 21.7 million to 21.4 million firms.

The number of employer firms fell by 2 percent, which shows that the bad news was felt across the board in 2008. Microbusiness employers with fewer than five employees declined in number by 2.4 percent; if you expand the category to include employers with fewer than 10 employees,  their numbers fell by 2.2 percent.

Non-micro small businesses with between 10 and 499 workers declined by 0.3 percent in number in 2007 and the population fell again in 2008, this time by 1.3 percent. Large firms saw a modest increase in population, of 0.9 percent (an additional 158 firms).  When the dust settles, the relative percentages of the business population, as classified by size, has not changed a smidgeon.

Nonemployers still comprise 78.2 percent of all U.S. firms. Microbusinesses with fewer than five employees still make up 92.4 percent of U.S. firms; microbusinesses with fewer than 10 employees are still 95.4 percent of U.S. firms. Non-micro small businesses make up 8.4 percent of all U.S. firms, and large businesses remain less than 1 percent of all firms.

tax calculator

Is There Life After Bankruptcy?

Theoretically, filing for bankruptcy is supposed to (sort of) wipe the slate clean and give small firms a fresh start. But does it?

That question was examined in a newly released research paper, Beyond Bankruptcy: Does the Bankruptcy Code Provide a Fresh Start to Entrepreneurs?“, written by Aparna Mathur with funding from the SBA Office of Advocacy.

The research findings were largely unsurprising. Approximately 2.6 percent of all small businesses have filed for bankruptcy at some point over the past seven years. Firms that have previously filed for bankruptcy perform similarly to other firms for most variables.

On the other hand, you probably won’t be surprised to learn that a bankruptcy filing does have a very negative impact on the ability of a firm to secure financing, and that is the case even when controlling for credit scores.

Firms that have a bankruptcy filing in their past are 24 percent more likely to be denied credit and, when they do secure credit, pay interest that is an average of 1 percent higher than what is charged to other, similar businesses.

AmEx OPEN Studies Women-Owned Firms

As of this year, an estimated 8.1 million (29 percent of) U.S. firms were women-owned (that is, a woman owned 51 percent or more of the company). Women-owned businesses generate almost $1.3 trillion in revenues and employing roughly 7.7 million people. That’s the main finding of an analysis of U.S. Census Bureau data on women-owned businesses performed by our old friend Julie Weeks of for American Express OPEN, based on data from the quinquennial Survey of Business Owners.

The analysis found that the number of women-owned firms grew at 1.5 times the national rate between 1997 and 2011, but that not many of them are growing very much. In 1997, 2.5 percent of women-owned firms had 10 or more employees and 1.8 percent had $1 million or more in revenues. In 2011, 1.9 percent of them have 10 or more employees and 1.8 percent have $1 million or more in revenues.

In addition, women-owned firms seem to stop growing at or before 10 employees and between $100,000 and $999,000 — which is what you would expect, if you were willing to factor microbusinesses into the equation. According to a November 2010 survey conducted by Vistaprint, a decisive 74 percent of microbusiness owner survey respondents indicated that they had no desire to grow their firms beyond 10 employees. In other words, the period from 1997 through the present has seen an unprecedented growth in the number of microbusinesses, and microbusiness owners keep their firms at micro size by choice, regardless of gender.

NSBA Releases 2011 Tax Survey

Right around tax day, the National Small Business Association (NSBA) released the results of its 2011 Small Business Taxation Survey, because that’s what we all want to do at that time of year: talk taxes. The survey demonstrated yet another instance in which there was a critical microbusiness issue but, evidently, there weren’t very many microbusinesses available to answer the questions about it.

Survey respondents identified economic uncertainty as the top challenge facing their business by a wide margin (66 percent), followed by “Decline in customer spending” (39 percent), “Cost of health insurance benefits” (35 percent), and regulatory burdens (32 percent). Federal taxes rounds out the top five challenges (29 percent). In light of the fact that 87 percent of small business owner respondents report paying an outside professional to prepare their taxes, it is somewhat shocking that almost 60 percent of small business owners still spend more than 40 hours dealing with federal taxes.

Another interesting set of numbers to emerge from this survey has to do with deductions. As much as lawmakers like to pat themselves on the back for repeatedly increasing Section 179 expensing, only 47 percent of these small business owners use it. And, under the category of Least Surprising Survey Result, only 18 percent of these respondents take the home office deduction, although 28 percent report working out of a home office.

Finally, almost two-thirds of survey respondents here support a combination of simplification and reduced tax rates as their preferred tack for reform. Then again, six in 10 would also favor a proposal such as the Fair Tax Act of 2011 (H.R. 25), which would eliminate income taxes, payroll taxes, estate taxes and gift taxes, and replace them all with a 23 percent national sales tax.

Study: Corporations Grow, Proprietorships Don’t

Most U.S. business owners make a decision about the legal form of their business at startup and rarely change it within the first few years of operation. That is the principal finding of a new research report, entitled “How Do Firms Choose Legal Form of Organization?”, written by Rebal Cole with funding from the SBA Office of Advocacy.

Advocacy released the study last week. According to Cole’s findings, only one in three firms starts its operations as a sole proprietorship, while almost another third start life as limited liability companies and corporations. Once the choice is made, it appears to be fairly stable; only 9 percent of companies changed their legal form of organization during the four years covered by the study. If all this sounds peculiar to you, there is a reason for it. Dr. Cole used data from the Kauffman Firm Survey in order to do this study. It shouldn’t be surprising that Kauffman’s database is rather thin on microbusiness survey respondents (85 percent of which are sole proprietorships).

In any event, firms are more likely to change forms if they are growing, if they move out of their home office and into commercial space, if there is a change of owners or if the number of owners grows, if the firm is highly leveraged, or if the firm changes industry. Finally, this research shows that corporations grow twice as fast as sole proprietorships. From all this, Dr. Cole concludes that policymakers can encourage entrepreneurs to select business forms that “are conducive to growth and complexity.”

But corporations don’t grow because they are corporations. They grow because of the choices of their management teams. And ultimately, the federal government probably needs to stop wasting its time (and our money) on this sort of thing. Owners who want to grow their firms will do so, with our without incentives. Owners who don’t want to grow their firms won’t, no matter what you offer them.

More in:

Dawn R. Rivers Dawn R. Rivers, an award-winning small business journalist, regularly reports and analyzes small business policy and research as the publisher of the MicroEnterprise Journal. She also publishes research at the Microbusiness Research Institute and she blogs at The MicroEnterprise Journal Blog.