Small Business Questions & Answers


Filed under Start Up

Ask About the Role of Small Business in Our Economy

by Adam Smith, Jr. | May 24, 2012

Subject :Business Resources

Dear Toolkit,

I heard that 99% of all the businesses in the U.S. are 'small' businesses. Is this true? And what's the definition of a small business anyway?

Adam Smith, Jr.

Dear Adam Smith, Jr.,

You heard right! According to a report prepared for Congress from the Census data in 2003, small businesses comprised 99.7% of all the businesses in the nation.

For purposes of this report, the definition of 'small' was any business with fewer than 500 employees. There are many official size standards, but this is the one commonly used.

Census data shows 5.8 million small firms with employees and 18.6 owner-operated firms with no employees. These small firms employed 58.6 million workers as compared to the 17,000 large firms which employed 56.5 million. So over half of all private-sector employees in 2003 worked for a small business and these firms paid 45 percent of all private payroll dollars for that year. About 53 percent were home-based and another 3 percent were franchises.

A 2007 SBA-funded study indicated that between 1998 and 2004 small businesses produced 50 percent of the gross domestic product (GDP). The role of small firms in exports is also interesting. In 2004, small businesses totaled 97 percent of all export firms, but the value of their exported goods was only 29 percent of all total exports for that year.

Your namesake was always interested in job-creation economics, so let's take a look at that, too. (Adam Sr. was pro-entrepreneur and very anti-organized labor.) Between 2002 and 2003, our national employment grew by about one million jobs. Small businesses added two million jobs during that period, and firms with more than 500 employees decreased their headcounts by around a million. Very small businesses with 1-4 employees added the most jobs, a little over a million, while larger firms (5-499) grew at a much smaller rate.

And check this out: In 2004, the average household income for small business owners was $143,000 while non-owners made $56,000, according to another 2007 SBA study. Average household wealth was $1.4 million for owners vs. $256,000 for non-owners. And the trend is for this gap to continue widening.

You'd be surprised how many practical facts and trends are to be discovered at our government's Census site and Bureau of Labor Statistics (BLS) site, and many, many others. The SBA and the IRS are two more examples of agencies showing a good effort to make their data user-friendly for many business planning purposes.