Small Business FAQ

Q: What is a small business?

A: The U.S. Small Business Administration's (SBA) Office of Advocacy defines a small business for research purposes as an independent business having fewer than 500 employees. Firms wishing to be designated small businesses for government programs such as contracting must meet size standards specified by the SBA's Office of Size Standards. These standards vary by industry. See http://www.sba.gov/size/.

Q: How important are small businesses to the U.S. economy?

A: Small firms:

1. Represent 99.7 percent of all employers.
2. Employ half of all private sector employees.
3. Pay 44.3 percent of total U.S. private payroll.
4. Generate 60 to 80 percent of net new jobs annually over the last decade.
5. Produce 13 to 14 times more patents per employee than large patenting firms.
6. Are employers of 39 percent of high tech workers (such as scientists, engineers, and computer workers ).
7. Are 53 percent home-based and 3 percent franchises.

Q: How many small businesses are there?

A: In 2003, there were approximately 23.7 million businesses in the United States, according to SBA Office of Advocacy estimates. The Internal Revenue Service (IRS) estimates there were 27.0 million business tax returns in 2003; however, this number may overestimate the number of firms, as one business can operate more than one taxable entity. IRS estimates the number of sole proprietorships (roughly equivalent to nonemployers) increased by 2.4 percent in 2002 and by 1.9 percent in 2003.

Q: How many small businesses open and close each year?

A: Estimates for businesses with employees indicate there were 572,900 new firms and 584,800 closures (both about 10 percent of the total) in 2003.

Starts and Closures of Employer Firms, 1995-2003

e = Estimate using percentage changes in similar data provided by the U.S. Department of Labor, Employment and Training Administration

Sources: U.S. Bureau of the Census; Administrative Office of the U.S. Courts; U.S. Department of Labor, Employment and Training Administration.

Q: How are small businesses financed?

A: About 80 percent of small firms use some form of credit. Small firms use many different sources of capital, including their own savings, loans from family and friends, and business loans from financial institutions. Credit cards, credit lines, and vehicle loans are the most often used types of credit. Commercial banks are the leading suppliers of credit, followed by owners and finance companies.

Q: how do regulations affect small firms?

A: Very small firms with fewer than 20 employees spend 60 percent more per employee than larger firms to comply with federal regulations. Small firms spend twice as much on tax compliance as their larger counterparts.

Source: U.S. Small Business Administration