Saturday, January 4, 2014

Defining a small business

Politicians on both sides of the aisle like to talk about how small businesses will be impacted by various legislation.  People like small businesses and trust them.  In February of 2012, the Pew Research Center found that 75% of Americans think that small businesses are having a positive effect on the way things are going in the country today.  Only 18% of Americans believed that small businesses are having a negative impact on the way things are going in this country.  Meanwhile in the same poll, 28% of Americans believe that large corporations are having a positive impact on the way things are going and 57% of Americans believed that large corporations have a negative impact on the way things are going.  In March of 2010, small businesses had a 79% favorable rating.  Only 9% of people had an unfavorable view of small businesses.  Maybe it's because Americans like the little guy or maybe it's because we all have dreams of being our own boss and running a company, but for some reason we love small businesses.

I, personally, think it's because we talk about small businesses we mean a variety of things.  But for many, a small business is the mom and pop shop down the street.  That's not entirely correct.  The United States Small Business Administration defines a small business as one with fewer than 500 employees.  There are slightly more than 6 million firms (6.05 million), or businesses, in the United States.  About 5.41 million businesses employ less than 20 employees.  5.81 million businesses employ less than 50.  5.94 million businesses employ less than 100.  6.03 million employ less than 500.  All told, 99.7% of firms with employees are considered small businesses by that standard.  That is the general standard that politicians use when they talk about small businesses.

But there are more complex rules out there.  For loans, the Small Business Administration requires the company to be independently owned and operated and not be the dominant company in its field.  That is determined either by the average number of employees for the past year or the three-year average of revenues. A manufacturing company could be a small business if it employs 500 to 1500 employees depending on what it is manufacturing.  Service providers might be considered small if they make less than $2.5 to $21 million in revenue.  A retail business may be small if it makes $5 million to $21 million.

Now we've started to define what a small business is.  But we should also define what a small business isn't.  A small business isn't necessarily a job creator.  3.71 million business employ 0-4 people.  According to the U.S. Department of Treasury, only one-fifth of small businesses fit the definition of an employer.

So, why are we constantly told that small businesses are the backbone of our economy or are constantly worried that small businesses can't create jobs?  Politicians have been using findings from the Office of Tax Analysis.  The Office of Tax Analysis counts a small business owner as an "individual who receives flow-through income from a sole proprietorship, partnership, S corporation, farming operation or miscellaneous rental activity."  Using this definition, someone could be considered a small business if they receive rental income, as well.  That's insane.

The U.S. Treasury Department eliminated from their definition of a small business that doesn't have any business activity.  It also limits their definition to businesses that make less than $10 million in gross income.  That's more in line with the idea that we typically have of small businesses.

But that's not what is usually used as a definition by politicians.  John Boehner and other Republican politicians state that taxes on millionaires will hurt small businesses.  The claim is that millionaires are the ones who are creating the jobs through these small businesses.  This gets people upset because they think about the mom and pop shop down the street and that these taxes will put these types of shops out of businesses.  But, what the U.S. Department of Treasury found that 13% of millionaires are small business owners.  What's even more striking is that only 0.5% of all small business owners are millionaires.

But I still haven't answered the original question of why do people trust small businesses?  Well, it's pretty clear that we do not have an understanding of what is an actual small business.  The vast majority of small businesses already do not employ anybody or very many people.  So, why would people get upset about making it harder for small businesses to hire?  Well, we're conflating the definitions of what a small business is.  One measure of small businesses would be that 99.7% of businesses are small businesses.  So, of course they're the ones creating the jobs.  But, really, we're looking at about 20% of small businesses creating the vast majority of jobs.  Why is that important?  Unless we come up with a real definition of what a small business is, we're unlikely to get away from the overgeneralized idea of what a small business is.  Until then, politicians will continue to prey on the ideal version of what a small business is, just like major food corporations prey on the ideal version of a farmer for factory farming practices.

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