Small comprise what share of What is a small ? What is small businesses’ share of net the U.S. economy? The of Advocacy defines a small new jobs? Small businesses make up: business as an independent business Small firms accounted for 64 percent of 99.7 percent of U.S. employer firms, having fewer than 500 employees. For the net new jobs created between 1993 64 percent of net new private-sector the small business definition by indus- and 2011 (or 11.8 million of the 18.5 jobs, try used in government programs and million net new jobs). Since the latest 49.2 percent of private-sector contracting, see www.sba.gov/content/ recession, from mid-2009 to 2011, small , small-business-size-standards. firms, led by the larger ones in the cat- 42.9 percent of private-sector payroll, egory (20-499 employees), accounted for 46 percent of private-sector output, What percent of small businesses 67 percent of the net new jobs. 43 percent of high-tech employment, operate as . . . ? Source: Bureau of Labor Statistics, BED. For 98 percent of firms exporting goods, The many kinds of small businesses are the latest employment statistics, see Advo- and shown in table 1. The definitions overlap cacy’s quarterly reports, www.sba.gov/advo- 33 percent of exporting value. so the shares total more than 100. cacy/10871. Source: U.S. Census Bureau, SUSB, CPS; International Trade Administration; Bureau How can small businesses’ share of of Labor Statistics, BED; Advocacy-funded Table 1: Small Business Shares net new jobs be larger than their share research, Small Business GDP: Update 2002- Kind of Business Share (percent) of employment, yet their share of 2010, www.sba.gov/advocacy/7540/42371. employment remains steady? Home-based business 52.0 As firms grow, they change employment How many small businesses are there? Franchise 2.0 size classes. So as small firms grow, In 2010 there were 27.9 million small Sole proprietor 73.2 their growth counts toward small firm businesses, and 18,500 firms with 500 19.5 job gains; but if they pass the 500-em- employees or more. Over three-quarters Employer business 21.5 ployee mark, their employment is classi- of small businesses were nonemploy- Nonemployer (business fied as large firm employment. 78.5 ers; this number has trended up over the without employees) past decade, while employers have been Do the unemployed become self-employed? Source: U.S. Census Bureau, SBO, SUSB. relatively flat (figure 1). When finding work is difficult, start- ing a business can be just as difficult Figure 1: Number of Businesses (millions) if not more so. But in March 2011, a significant number of the self-employed, Employers Nonemployers 5.5 percent or about 900,000, had been 23 unemployed in the previous year. This figure was up from March 2006 and 21 March 2001, when it was 3.6 and 3.1 6.5 percent, respectively. 19 Which businesses create more jobs— 5.5 Employer 17 startups or existing businesses? In the last two decades about 60 percent 15 of the private sector’s net new jobs have 4.5 been created by existing establishments Nonemployers (right scale) 13 and about 40 percent from the churn of startups minus closures. While firm 3.5 11 births account for many new jobs, job 1985 1990 1995 2000 2005 2010 losses from firm closures are equally important in for net effects to employment levels. Source: U.S. Census Bureau, SUSB and Nonemployer Sta s cs. Source: Bureau of Labor Statistics, BED.

Page 1 Frequently Asked Questions about Small Business September 2012

, Figure 2: Mean Employment Level for Firm Figure 3: Number and Size of Establishment Births Birth Year, 1995–2010 (millions) Employment per Establishment 3.07 establishment starts (thousands) 2.96 2.77 2.61 2.48 8 250 2.36 2.15 Births (right scale) 1.94 7 1.82 6 200 5 150 4 3 Average employment 100 2 (left scale) 6 to 10 16 to 20 50 0 1 2 3 4 5 11 to 15 1 1998 2000 2002 2004 2006 2008 2010 2012 Years in existence

Source: U.S . Census Bureau, BDS. Source: Bureau of Labor Statistics, BED.

What happens to the jobs created by How many businesses do veterans own? example, they were 2 percent for those startups? Veteran-owned businesses numbered 3.7 25 and under and 23 percentSole for those 65 The total employment from a group of million in 2007, with average receipts of and over in 2010. startups is highest at birth and declines $450,000 (table 2). Source: Office of Advocacy calculations using as the firms age. Put another way, em- Source: U.S. Census Bureau, SBO. U.S. Census Bureau, CPS data. ployment gains from growing business- es are less than employment declines Is youth increasing? What are the home-based business from shrinking and closing businesses trends? (figure 2). Self-employment among younger age groups has been dropping. From 2005 to The share of firms that primarily oper- ate out of the home was unchanged from What is the status of the startup market? 2010, self-employment among indi- viduals age 25 and under decreased 19 2002 to 2007 at 52 percent (the latest While the number of new employer percent (compared to a 7 percent drop figure available). Employers had a lower businesses has recovered from the reces- in the overall population). In contrast, share than nonemployers, 24 percent vs. sionary dip, the average employment of self-employment among those age 65 63 percent, respectively, in 2007. Of the these businesses has been declining over and over increased 24 percent over this major industries, construction had the the past decade (figure 3). period as their population grew. Self- highest share of home-based businesses, employment rates increase with age; for 70 percent. (Being home-based is not How many businesses do women own? synonymous with working at home.) It is While women-owned firms have in- Table 2: Number of Firms and interesting to note that trade went creased as a share of total businesses Receipts by Demographic, 2007 from 49 percent home-based in 2002 to over the years, their size still remains 44 percent in 2007 while the share of Receipts smaller than national averages. The 7.8 Business Owner Firms retail went from 1 percent per firm million women-owned firms averaged Demographic (millions) to 3 percent of total retail sales. ($1,000) $130,000 in receipts in 2007 (table 2). Source: U.S. Census Bureau, SBO and Quar- All businesses 27.1 1,070 terly E-Commerce Report. How many businesses do minorities own? Male 13.9 570 Asian-owned businesses numbered 1.6 Female 7.8 130 How does franchise survival compare Equally male/ million in 2007 and have average receipts 4.6 240 with independent business survival? of $290,000. African-American-owned female Survival among independent businesses businesses numbered 1.9 million in 2007 African-American 1.9 50 and franchises appears to be similar, as and have average receipts of $50,000. Asian 1.6 290 they have similar age distributions. Of Hispanic-American-owned businesses Hispanic 2.3 120 course each potential business owner Native American/ numbered 2.3 million in 2007 and have 0.3 120 debating an independent business or Pacific Islander average receipts of $120,000. Native franchise arrangement will have unique Veteran 3.7 450 American/Islander-owned businesses factors to weigh, such as their manage- numbered 0.3 million in 2007 and have Publicly held 0.8 23,860 rial talent and sales abilities. average receipts of $120,000 (table 2). Source: U.S. Census Bureau, SBO.

Page 2 Frequently Asked Questions about Small Business September 2012 Figure 4: Startups and Closures Figure 5: Cumulative Survival Rates for (thousands of establishments, seasonally adjusted) Establishments by Birth Year Percent of 1,000 establishments Deaths Births 100 1995 800 2000 80 2005 600 60 2010 400 40 20 200 1999 2001 2003 2005 2007 2009 2011 0 0 2 4 6 8 101214 Source: Bureau of Labor Statistics, BED. Years in existence Source: Bureau of Labor Statistics, BED.

Table 3: Employer Firm Births and Deaths* How are small businesses financed? Small businesses are financed through 1999-2000 2004-2005 2007-2008 2008-2009 owner savings; from family, Births 574,300 644,122 597,074 518,500 friends, and commercial lenders; bonds; Deaths 542,831 565,745 641,400 680,716 ; ownership stakes; and other arrangements. For detailed financing *Figures are March to March. information, see Advocacy’s Frequently Source: U.S. Census Bureau, SUSB. Asked Questions about Small Business Finance, www.sba.gov/advocacy/9601. Source: Advocacy research, Do Business Defi- What is the survival rate for new nition Decisions Distort Small Business Re- businesses? How are credit conditions for small search Results? http://archive.sba.gov/advo/ firms? research/rs330tot.pdf. Note that about half of About half of all new establishments the franchises in the data were nonemployers, survive five years or more and about For up-to-date statistics, see Advocacy’s which may not be the stereotypical franchise one-third survive 10 years or more. quarterly reports, www.sba.gov/ that individuals imagine. As one would expect, the probability advocacy/10871. of survival increases with a firm’s age. How many businesses open and close Survival rates have changed little over What is small businesses’ share of each year? time (figure 5). federal government procurement? About 10-12 percent of firms with em- In fiscal year 2011, 21.7 percent of fed- ployees open each year and about 10-12 How do small and large businesses eral government small-business–eligible percent close (table 3). Employer firm compare on innovation? purchases went to small businesses. births were down and deaths were up in Of high patenting firms (15 or more in The Department of Defense accounted the most recent available data because a four-year period), small businesses for the majority of small business pro- of the downturn. But establishment birth produced 16 times more patents per curement. figures from 2011 show gains (figure 4). employee than large patenting firms. Source: Small Business Goaling Report, 2012, Nonemployer firms have turnover rates Research also shows that increasing the www.fpdsng.com/downloads/top_requests/ three times as high as employer firms, number of employees correlates with FPDSNG_SB_Goaling_FY_2010.pdf. mostly because it is easier for nonem- increased innovation while increasing ployers to start and stop, as they tend to sales does not. How are business churn and the economy be smaller than employer firms. Busi- related? ness numbered 48,000 in Source: Advocacy-funded research, An Analysis of Small Business Patents by Industry and Firm Business churn (the sum of the firm 2011, a decline of the about 60,000 over Size, http://archive.sba.gov/advo/research/ birth and death rates) tends to follow the previous two years. Note that not all rs335tot.pdf; Innovation in Small Businesses: the change in GDP with a six-quarter firm deaths are business bankruptcies, Drivers of Change and Value Use, www.sba. lag (figure 6). Recently, churn has been and many business owners file personal gov/sites/default/files/rs342tot_0.pdf. down, which may be a response to the instead of business - general decline in output. ruptcy.

Page 3 Frequently Asked Questions about Small Business September 2012 What are the effective rates for small Do you have any newer data? Abbreviations & Sources businesses? For updates of many quarterly small The average effective tax rate for busi- business indicators, see www.sba.gov/ BED Business Employment Dynam- nesses organized as sole proprietorships advocacy/10871. For more details and ics. U.S. Department of Labor, was 13.3 percent in 2004, with small information, visit Advocacy’s general Bureau of Labor Statistics, S facing the highest rates website, www.sba.gov/advocacy. Two www.bls.gov/bdm. (table 4). (An effective tax rate is usu- of the most comprehensive pages are BDS Business Dynamics Statistics. ally defined as the amount of tax paid as the Data Resources page and the Firm U.S. Department of Commerce, a fraction of or profit.) Size Data page. Both are accessible Census Bureau, www.census. from www.sba.gov/advocacy/849. Two gov/ces/dataproducts/bds. other often visited pages are the Banking Table 4: Effective Tax Rates, 2004 CPS Current Population Survey. U.S. Study (www.sba.gov/advocacy/ Census Bureau, and U.S. Depart- Legal form of Effective tax rate 7540/173967) and the State Small ment of Labor, Bureau of Labor business ownership (percent) Business Profiles (www.sba.gov/advo- Statistics, www.census.gov/cps. Non-farm sole cacy/848). Additional questions may be 13.3 SBO Survey of Business Owners. U.S. proprietorship emailed to [email protected]. Census Bureau, www.census. 23.6 gov/econ/sbo. S corporation 26.9 SUSB Statistics of U.S. Businesses, C corporation 17.5 U.S. Census Bureau, www.cen- Source: Advocacy-funded research, Effective sus.gov/econ/susb. Federal Income Tax Rates Faced By Small Businesses in the , www.sba. gov/sites/default/files/rs343tot.pdf.

What legal form of organization are small About the Office of Advocacy businesses? Sole proprietors and con- The SBA’s Office of Advocacy was created by Congress in 1976. Part of the stituted 94 percent of nonemployers in office’s mission includes conducting policy studies and economic research 2010 and of the corporations, most were on issues of concern to small businesses. The office also publishes data on likely S corporations which are taxed at small firm characteristics and contributions. For further data and research personal rates. Twenty-two percent of information, visit the Office of Advocacy’s website at www.sba.gov/ small employers were C corporations in advocacy/847. 2009, with 71 percent taxed at personal rates and 7 percent nonprofits (figure 7).

Figure 6: Business Churn versus Output (percent) Figure 7: Legal Form of Organization of Small Business Sole Churn Real GDP Other, 0% proprietorship 7.0 9 C corporation 16% Real GDP (annualized change) 22% Partnership (right scale) 6 11% S corporation 6.5 3 Nonprofit, 7% 44% 0 6.0 Small Employer Firms Business churn rate -3 Corporations (births plus deaths), Partnership -6 7% 5.5 lagged six quarters (left scale) 7% -9 5.0 -12 86% Nonemployers 1996 1998 2000 2002 2004 2006 2008 2010 , Source: Bureau of Labor Statistics, BED (churn); Bureau of Economic Analysis (GDP). Source: U.S. Census Bureau, SUSB and Nonemployer Statistics.

Page 4 Frequently Asked Questions about Small Business September 2012