By: Michael Thomas
Starting a new business or running a small one comes with a number of hurdles that a business owner must overcome. An entrepreneur trying to get a business off the ground must have a new product, idea, or service that adds some value; find funding to support the development of the idea or product, and eventually get it to the relevant market. Similarly, a small business must continue to find ways to grow and stay competitive in a marketplace that usually includes much larger companies with extensive resources. In addition to these concerns, studies indicate that the regulatory burden plays an important role in the development and growth of small businesses.
Data collected by the U.S. Department of Labor shows the number of businesses less than one year old increased steadily from 1994, where the number was roughly 570,000, up until 2006 when that number reached a high of 715,734. Following 2006 this number decreased rapidly, and as a result of the recession hit a low in 2010, dropping by almost 25%. Since 2010 that number has been on the rise and in 2015 the number of businesses less than one year old was 679,072, a number approaching the high point reached in 2006. The study also shows that jobs created by businesses less than one year old are trending along the same lines but with a slower rate of increase. In 1999 the number of jobs created by businesses less than one year old reached a high of 4,736,499. As a result of the recession, this number was cut almost in half to roughly 2,500,000. Following the recession new jobs created by businesses less than one year old have increased by a rate of roughly 15,000 jobs/year but this number is nowhere near the level seen in 1999. However, the data is certainly encouraging as the number of businesses/year and jobs/year are clearly on the rise. The question still remains, could these numbers be better?
Regulations matter to businesses of all sizes but they particularly affect small businesses and start-ups. Many small businesses and start-ups lack the resources to devote a special department or person to compliance work. In most cases the founder acts as the compliance, finance, sales, supply chain, and development person. This makes the cost/person of dealing with regulations higher for smaller businesses. Small business owners indicated tax, healthcare, and overtime regulations as the most burdensome. The U.S. Small Business Administration does provide some helpful guidance in this area but if the owner cannot handle this work on their own, they must spend the money and hire someone to help.
Regardless of the industry or business a start-up enters, there are undoubtedly a number of laws and regulations that need to be complied with. This is in addition to any licenses and permits that need to be acquired. For a new or small business, ensuring compliance with these regulations is time consuming as well as costly. Sorting through the often difficult to read regulations takes time. A study by the National Small Business Association (“NSBA”) reports that roughly 44% of small businesses spend at least 40 hours a year ensuring they are in compliance with tax, healthcare, and employment regulations. While this may not seem like a large number it is worth considering that many people starting new business or running their own small business hold another job. When taking into account everything else that needs to be done to get a new business up and running, 40 hours a year can be a substantial amount of time devoted to understanding regulations. In addition to the actual time spent on regulations, the yearly costs small businesses spend on compliance are roughly $12,000. One of the more surprising values from the study by the NSBA was the estimated average regulatory start-up costs incurred by small business owners, $83,000. Given 55% of all businesses have gross revenues under $1,000,000 in their first year, the study highlights the considerable time and cost spent on understanding regulations and compliance by those starting and operating new businesses.
Many small businesses indicate that regulations at the federal level cause the highest burden. In an effort to ease some of the burden, two executive orders have been signed this year by President Trump. The first was signed on January 30th, 2017 with small business owners surrounding the President and is meant to reduce regulation and control regulatory costs for private businesses. The second, signed four days later on February 3, 2017, is targeted at easing the restrictions on financial institutions. It is important to keep in mind that while these executive orders do not create new laws (very limited exceptions apply), they do set policy directives that Congress and federal agencies must follow.
The order reducing regulations and regulatory costs has some key components listed in the directive. The order’s primary method of reducing regulations is laid out in Section 1; it states “that for every one new regulation issued, at least two prior regulations be identified for elimination.” The order also carries provisions which cap the net increase in regulatory costs at zero “unless otherwise required by law” and setting a budget for fiscal year 2018 and beyond. There are certain exceptions listed in Section 4 of the order such as regulations pertaining to national security, the military, and agency organization. While it is unlikely the order will produce any significant changes, it will hopefully result in the purging any outdated or ineffective regulations. This matters to start-ups and small businesses because it eliminates unnecessary reading and time spent understanding complexly written rules that do not apply. This can save time and money for small businesses and start-ups, allowing them to allocate it elsewhere such as revenue and job growth.
The executive order signed February 3, 2017 seeks to “foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis.” This goal of this order is to ease restrictions on financial and lending institutions. This matters to small business owners because when the Dodd-Frank Act was passed it had the effect of severely slowing down lending by banks. This made it very difficult for small businesses and start-ups to get loans. Although the executive order imposes broad principles, it has the ultimate goal of easing regulations for financial institutions that in turn could increase the availability of capital to small businesses and start-ups.
There are many factors that go into ensuring start-ups and small businesses continue to grow and provide jobs. Reducing the regulatory burden is simply one piece to the puzzle and will hopefully help encourage those with a good idea to start their own business and keep existing small businesses running. In addition to the actual reduction of regulations, things such as making regulations easier to understand and reducing penalties for first time offenders acting in good faith would help alleviate costs and concerns. It remains to be seen how these executive orders will play out or how long it will take for them to have an effect, but hopefully their goals are realized through continued growth for the start-ups and small businesses.