Small Businesses in the Small Businesses in the U.S.A.U.S.A.

ByBy

Bruce A. Kirchhoff, Ph.D.Bruce A. Kirchhoff, Ph.D.

April 22, 2008April 22, 2008

Demographics of U.S. Small Demographics of U.S. Small BusinessesBusinesses

INTRODUCTIIONINTRODUCTIION The small business sector of the U.S. The small business sector of the U.S.

economy has been and continues to be an economy has been and continues to be an active contributor to the U.S. economy.active contributor to the U.S. economy.

This presentation provides information about This presentation provides information about this sector and how it performs its vital role this sector and how it performs its vital role in the U.S. economyin the U.S. economy

Organization of This PresentationOrganization of This Presentation

Demographics of the Small Business SectorDemographics of the Small Business Sector Dynamics of the Small Business SectorDynamics of the Small Business Sector Future of the Small Business SectorFuture of the Small Business Sector

Demographics of the Small Business Demographics of the Small Business SectorSector

How many small firms exist?How many small firms exist? What percentage of all firms are small?What percentage of all firms are small? Is the percentage increasing or decreasing?Is the percentage increasing or decreasing? What problems exist in the collection of What problems exist in the collection of

these statistics?these statistics? What is the economic contribution of small What is the economic contribution of small

firms?firms? Has this been consistent over the last 25 Has this been consistent over the last 25

years?years?

DemographicsDemographics There are approximately 27 million firms in the U.S.There are approximately 27 million firms in the U.S. Of these, Of these,

– 21.0 million have no employees21.0 million have no employees– 6.0 million have employees6.0 million have employees- 17.5 thousand have over 500 employees17.5 thousand have over 500 employees- 5.98 million have fewer than 500 employees5.98 million have fewer than 500 employees- 87.3 thousand have 100 to 499 employees87.3 thousand have 100 to 499 employees- 5.97 million have less than 100 employees5.97 million have less than 100 employees- 5.4 million have fewer than 20 employees5.4 million have fewer than 20 employees

Large firms total only 17.5 thousand and employ slightly Large firms total only 17.5 thousand and employ slightly less than half of all employees in the U.S. (49.2 percent)less than half of all employees in the U.S. (49.2 percent)

Firms with less than 100 employees are 99.5 percent of all Firms with less than 100 employees are 99.5 percent of all firms in the U. S. and employ 35.9 percent of all firms in the U. S. and employ 35.9 percent of all employees.employees.

Demographics (continued)Demographics (continued) Statistical inaccuracies - Due to the fact that the Statistical inaccuracies - Due to the fact that the

US has US has NONO business registration business registration Statistics are gathered from data collected for Statistics are gathered from data collected for

administrative purposesadministrative purposes– Count of firms is taken from annual income tax filingsCount of firms is taken from annual income tax filings– Bureau of the Census counts number of firms with Bureau of the Census counts number of firms with

employees based largely on Social Security* records.employees based largely on Social Security* records.– The vast majority of small firms have no employeesThe vast majority of small firms have no employees– More than half of businesses with zero to 100 More than half of businesses with zero to 100

employees are sole proprietorships.employees are sole proprietorships.__________________________________________________________

* * Social Security is the federal government’s required retirement benefit Social Security is the federal government’s required retirement benefit system. All private sector employees must pay this from their wages.system. All private sector employees must pay this from their wages.

Demographics of Zero Employee Demographics of Zero Employee BusinessesBusinesses

Family owned and run small businesses are Family owned and run small businesses are mostly zero employee businesses because Social mostly zero employee businesses because Social Security rules restrict family members as Security rules restrict family members as employees.employees.

Other small businesses (especially in residential Other small businesses (especially in residential building industry) hire contractors rather than building industry) hire contractors rather than employees to avoid the cost of benefit programs.employees to avoid the cost of benefit programs.

Zero employee businesses are very hard to find Zero employee businesses are very hard to find and statistics on these are not very reliable.and statistics on these are not very reliable.

Forms of Legal Organization Forms of Legal Organization in the U.S.in the U.S.

There are three legal formsThere are three legal forms–CorporationCorporation

–PartnershipPartnership

–Sole proprietorshipSole proprietorship

Incorporation (Inc.)Incorporation (Inc.)

Corporation – a legal entity that exists separate Corporation – a legal entity that exists separate from its owners (shareholders).from its owners (shareholders).

Application to form a corporation is filed with a Application to form a corporation is filed with a state government that grants the incorporation state government that grants the incorporation (there are no federal corporations) (there are no federal corporations)

Corporations can be identified and counted Corporations can be identified and counted accurately. However, not all are functioning for accurately. However, not all are functioning for profit organizations.profit organizations.

Non government not for profit organizationsNon government not for profit organizations Non functioning businesses. Non functioning businesses.

PartnershipPartnership

Partnership – defined by a legal contract Partnership – defined by a legal contract between the partners. May or may not be between the partners. May or may not be filed with the state government except for filed with the state government except for income tax.income tax.

Not required to file with federal government Not required to file with federal government except income taxexcept income tax

There is no business registration required There is no business registration required with the federal government with the federal government

Sole ProprietorshipSole Proprietorship– Sole Proprietorship – technically legal but Sole Proprietorship – technically legal but

no form is filed with the government. And, no form is filed with the government. And, no registration with government required. no registration with government required.

– There are no requirements for licensing There are no requirements for licensing except for specialized functions (doctors, except for specialized functions (doctors, barbers, real estate brokers, etc.) or in barbers, real estate brokers, etc.) or in some local governments for retail and some local governments for retail and other businesses involving contact with other businesses involving contact with the general public. the general public.

– This form is the most common among This form is the most common among small businesses.small businesses.

Dynamics of Small BusinessesDynamics of Small Businesses

What is the survival rate of start-up What is the survival rate of start-up businesses?businesses?

Do formations exceed discontinuances?Do formations exceed discontinuances?

Survival of Small Business Survival of Small Business Start-upsStart-ups

Every year there are five to six hundred Every year there are five to six hundred thousand new non-farm businesses formed thousand new non-farm businesses formed with one or more employees.with one or more employees.

Most of these are less than 100 employeesMost of these are less than 100 employees The vast majority have zero employeesThe vast majority have zero employees Average survival percentages show half of Average survival percentages show half of

these survive beyond four years.these survive beyond four years.

Small Business DynamicsSmall Business Dynamics

Within six years, 60 percent of these Within six years, 60 percent of these disappear from our data collection files.disappear from our data collection files.

These are assumed to be discontinuances, These are assumed to be discontinuances, not failures.not failures.

Some are ownership transfers.Some are ownership transfers. Nonetheless, the total number of small Nonetheless, the total number of small

businesses increases every year. businesses increases every year.

  

Survival Rates of Start-up BusinessesSurvival Rates of Start-up Businesses  **

Four Independent Research StudiesFour Independent Research Studies    (percentages)*(percentages)*

YearYear 1***1*** 22 33 44 55 66 77 88 99 1010

Knaup and Piazza, Knaup and Piazza, 1998 Births1998 Births

8181 6666 5454 4444 3838 3434 3131 ---- ---- ----

Firms started from Firms started from 1996-1997 births1996-1997 births

7575 6464 5656 5050 4444 ---- ---- ---- ---- ----

Firms started from Firms started from 1991-1992 births1991-1992 births

7575 6464 5656 5050 4545 4040 3737 3434 3131 2929

Philips & Kirchhoff Philips & Kirchhoff 1978-1984 (1978 1978-1984 (1978 births)births)

---- 7676 ---- 4848 ---- 3838 ---- ---- ---- ----

Methods slightly differed among the three studies..Methods slightly differed among the three studies..

** Brian Headd, Redefining Business Success: Distinguishing Between** Brian Headd, Redefining Business Success: Distinguishing Between

Closure and Failure, Small Business Economics, 2006.Closure and Failure, Small Business Economics, 2006.

*** Technically this probably averages 1.5 years as the data tends to capture a firm’s existence mid-year. *** Technically this probably averages 1.5 years as the data tends to capture a firm’s existence mid-year. Source: U.S. Census Bureau, Statistics of U.S. Businesses, special tabulations, Knaup and Piazza (2007), and Phillips and Kirchhoff Source: U.S. Census Bureau, Statistics of U.S. Businesses, special tabulations, Knaup and Piazza (2007), and Phillips and Kirchhoff

(1989).(1989).

How Does the Number of Small How Does the Number of Small Firms Continue to GrowFirms Continue to Grow

The next graph shows the percent of new The next graph shows the percent of new firms growing and declining in employment firms growing and declining in employment beginning in 1992 through 2001.beginning in 1992 through 2001.

Notice that the percent growing always Notice that the percent growing always exceeds the declining except as the exceeds the declining except as the economy enters a recession in 2000-01economy enters a recession in 2000-01

This is how the number of employees in This is how the number of employees in small firms in the U.S. economy grows small firms in the U.S. economy grows every year.every year.

Percent of New Firms Growing and Declining in Percent of New Firms Growing and Declining in Employment in Each YearEmployment in Each Year

Future of Small BusinessesFuture of Small BusinessesContributions to Economic GrowthContributions to Economic Growth

Economic Growth is frequently measured as Economic Growth is frequently measured as growth in employment. Why employment?growth in employment. Why employment?– Employment is a count of real entities.Employment is a count of real entities.– Employment is not affected by inflation.Employment is not affected by inflation.– Employment increases are “politically Employment increases are “politically

desirable.” desirable.” – Elected officials frequently take pride in (and Elected officials frequently take pride in (and

credit for) the employment increases that occur credit for) the employment increases that occur during their term of office.during their term of office.

– Each new job (employee) is a friendly voter.Each new job (employee) is a friendly voter.

Small Business’ Share of Total Small Business’ Share of Total Employment Is DecliningEmployment Is Declining

In 1993, firms with less than 500 employees In 1993, firms with less than 500 employees employed 53.0 percent of all employeesemployed 53.0 percent of all employees

In 2003, firms with less than 500 employees In 2003, firms with less than 500 employees employed 50.1 percent of the US labor force.employed 50.1 percent of the US labor force.

Remember that when small firms grow, they Remember that when small firms grow, they become large firm employers.become large firm employers.

Yet the number of small firms with employees Yet the number of small firms with employees continues to grow from 5.2 million in 1993 to 5.8 continues to grow from 5.2 million in 1993 to 5.8 million in 2003.million in 2003.

And 60 to 80 percent of net new jobs annually And 60 to 80 percent of net new jobs annually have been created by small businesses.have been created by small businesses.

Guidance for Greater GrowthGuidance for Greater Growth

Are there guidelines to follow when seeking Are there guidelines to follow when seeking greater economic growth?greater economic growth?

What kind of business start ups should be What kind of business start ups should be encouraged?encouraged?

How do we attract “highly innovative” new How do we attract “highly innovative” new businesses? businesses?

Answer: Look for businesses that expect Answer: Look for businesses that expect and desire growth.and desire growth.

HIGHHIGH

HIGHLOW

LOWLOW

BUSINESS BUSINESS INNOVATION INNOVATION

RATERATE

BUSINESS GROWTH RATEBUSINESS GROWTH RATE

DYNAMIC CAPITALISM DYNAMIC CAPITALISM TYPOLOGYTYPOLOGY

INTERNALLYINTERNALLYCONSTRAINEDCONSTRAINED

GROWTHGROWTH

II III

IVIECONOMIC

COREAMBITIOUS

GLAMOROUS

© Kirchhoff, 1994

EXTERNALLYEXTERNALLYCONSTRAINEDCONSTRAINED

GROWTHGROWTH

Economic CoreEconomic Core The vast majority of small businesses are economic The vast majority of small businesses are economic

core businesses.core businesses. They have little interest in growth and show little They have little interest in growth and show little

growth.growth. They are everywhere and provide much of the They are everywhere and provide much of the

supplies and services we use everyday.supplies and services we use everyday. Craftsmen, local touring companies, bed and Craftsmen, local touring companies, bed and

breakfast hotels, local restaurants, gas stations, breakfast hotels, local restaurants, gas stations, barbers, local retailers, etc.barbers, local retailers, etc.

These are major contributors to every economy. In These are major contributors to every economy. In the US, estimates suggest they account for 35 to 40 the US, estimates suggest they account for 35 to 40 percent of economic activity.percent of economic activity.

Society could not survive without these.Society could not survive without these.

HIGHHIGH

HIGHLOW

LOWLOW

BUSINESS BUSINESS INNOVATION INNOVATION

RATERATE

BUSINESS GROWTH RATEBUSINESS GROWTH RATE

DYNAMIC CAPITALISM DYNAMIC CAPITALISM TYPOLOGYTYPOLOGY

INTERNALLYINTERNALLYCONSTRAINEDCONSTRAINED

GROWTHGROWTH

II III

IVIECONOMIC

COREAMBITIOUS

GLAMOROUS

© Kirchhoff, 1994

EXTERNALLYEXTERNALLYCONSTRAINEDCONSTRAINED

GROWTHGROWTH

Ambitious BusinessesAmbitious Businesses These are low innovation businesses that These are low innovation businesses that

achieve growth through spreading one or a achieve growth through spreading one or a combination of several innovations to an combination of several innovations to an every bigger market.every bigger market.

In the US, Wal*Mart is a retailer that has In the US, Wal*Mart is a retailer that has grown very fast; it is successful based on a grown very fast; it is successful based on a unique retailing design developed in the late unique retailing design developed in the late 1960’s.1960’s.

Toyota and Honda are well known symbols Toyota and Honda are well known symbols of world wide automobile manufacturing of world wide automobile manufacturing based on principles that were developed in based on principles that were developed in the 1960s and have expanded their sales the 1960s and have expanded their sales into every culture in the world.into every culture in the world.

Ambitious Businesses Ambitious Businesses (continued)(continued)

Eventually, when all potential markets are Eventually, when all potential markets are conquered, Ambitious Businesses conquered, Ambitious Businesses experience slower growth and in some experience slower growth and in some cases decline. cases decline.

Wal*Mart is beginning to experience this.Wal*Mart is beginning to experience this. Honda and Toyota continue to expand into Honda and Toyota continue to expand into

other nations China, India, etc. other nations China, India, etc.

HIGHHIGH

HIGHLOW

LOWLOW

BUSINESS BUSINESS INNOVATION INNOVATION

RATERATE

BUSINESS GROWTH RATEBUSINESS GROWTH RATE

DYNAMIC CAPITALISM DYNAMIC CAPITALISM TYPOLOGYTYPOLOGY

INTERNALLYINTERNALLYCONSTRAINEDCONSTRAINED

GROWTHGROWTH

II III

IVIECONOMIC

COREAMBITIOUS

GLAMOROUS

© Kirchhoff, 1994

EXTERNALLYEXTERNALLYCONSTRAINEDCONSTRAINED

GROWTHGROWTH

Glamorous BusinessesGlamorous Businesses Characterized by high rates of innovation Characterized by high rates of innovation

and growth.and growth. These are the businesses you know from These are the businesses you know from

the business news media.the business news media. Nearly all of these are technology Nearly all of these are technology

businesses because technology is a major businesses because technology is a major source of innovations.source of innovations.

Cisco, Intel, Nokia, Genentech, AmgenCisco, Intel, Nokia, Genentech, Amgen These started as small business and grew These started as small business and grew

very large.very large.

Glamorous BusinessesGlamorous Businesses(continued)(continued)

As long as the firm’s basic technology As long as the firm’s basic technology remains important, these companies remains important, these companies continue to grow. continue to grow.

Their great fear is that a substitute Their great fear is that a substitute technology will appear that replaces the technology will appear that replaces the firm’s technology. For example, the PC put firm’s technology. For example, the PC put all but one of the major computer all but one of the major computer manufacturers of the 1960s/1980’s out of manufacturers of the 1960s/1980’s out of business by 1996.business by 1996.

HIGHHIGH

HIGHLOW

LOWLOW

BUSINESS BUSINESS INNOVATION INNOVATION

RATERATE

BUSINESS GROWTH RATEBUSINESS GROWTH RATE

DYNAMIC CAPITALISM DYNAMIC CAPITALISM TYPOLOGYTYPOLOGY

INTERNALLYINTERNALLYCONSTRAINEDCONSTRAINED

GROWTHGROWTH

II III

IVIECONOMIC

COREAMBITIOUS

GLAMOROUS

© Kirchhoff, 1994

EXTERNALLYEXTERNALLYCONSTRAINEDCONSTRAINED

GROWTHGROWTH

Constrained Growth BusinessesConstrained Growth Businesses These are start up businesses that have a good These are start up businesses that have a good

innovative product/service but fail to acquire the innovative product/service but fail to acquire the

resources or capabilitiesresources or capabilities to be successful. to be successful. Resources – investors moneyResources – investors money Capabilities – talented peopleCapabilities – talented people Finding the money and selecting and attracting the Finding the money and selecting and attracting the

right people are critical for growth.right people are critical for growth. Without resources and capabilities, they will not Without resources and capabilities, they will not

achieve growth.achieve growth.

Other ConstrainedOther Constrained

Constrained growth business are either self Constrained growth business are either self constrained or other constrained.constrained or other constrained.

I find that among high technology businesses, the I find that among high technology businesses, the technologists always feel that others are technologists always feel that others are constraining them – constraining them – – investors refuse to provide funds, investors refuse to provide funds, – capable workers refuse to work for shares of stockcapable workers refuse to work for shares of stock

The truth is they blame others to avoid admitting The truth is they blame others to avoid admitting to their own mistakes.to their own mistakes.

Self ConstrainedSelf Constrained

This condition is much more common This condition is much more common among high tech companies.among high tech companies.

Technologists or inventors simply do not Technologists or inventors simply do not understand that the rest of the world does understand that the rest of the world does not have a strong belief in their technology.not have a strong belief in their technology.

Money and capable labor move into firms Money and capable labor move into firms with a clearly defined market and a working with a clearly defined market and a working product that will meet that markets’ needs product that will meet that markets’ needs

SummarySummary Small Businesses are the back bone of every Small Businesses are the back bone of every

economy in the world.economy in the world. Small businesses are as important in an industrial Small businesses are as important in an industrial

economy as a agricultural economy.economy as a agricultural economy. Economic growth through small businesses is Economic growth through small businesses is

achieved by promoting new formations and achieved by promoting new formations and assisting them to grow.assisting them to grow.

But, focus should be on those that suggest their But, focus should be on those that suggest their business can be characterized as ambitious or business can be characterized as ambitious or glamorous and pursue these as their objective. glamorous and pursue these as their objective.

THE ENDTHE END