Small Businesses and Their Impact on the Economy
Small businesses are companies that employ fewer than 500 employees (manufacturing) or 100 employees (wholesale trade). The federal government has specific definitions for small businesses in all other industries.
The Small Business Administration defines small businesses as follows:
That's important to know if you are looking for a small business small business federal grant or a federal small business loan. Most federal agencies and many state and local governments use SBA size standards.
The chart below illustrates how many companies employ 1–99 people, 100–999, and 1000+.
How Small Businesses Affect the U.S. Economy
Small businesses are critical to U.S. economic growth. They contribute 65% of all new jobs. Without small businesses, the economy won't grow.
The Congressional Research Service found that the best job creators were firms with 20-499 employees. They are more likely than smaller firms to remain in business after five years. At least half of all new start-ups fail before that milestone.
The vast majority of companies in the United States are very small businesses. In fact, 96% have 50 or fewer employees. That's 5.8 million out of 6 million total companies. Yet, they employ just about 34 million workers. (Source: Healthcare.gov)
Programs to Help Small Businesses
The federal government recognizes the important role of small businesses. It targets programs for small business owners in most major legislation. Here are some examples.
The Tax Cuts and Jobs Act of 2017 helped small businesses that are pass-through businesses. These include sole proprietorships, partnerships, limited liability companies, and S corporations. They also include real estate companies, hedge funds, and private equity funds.
The Act offers them a 20% standard deduction on qualified income. This deduction ends after 2025. The deductions phase out for service professionals once their income reaches $157,500 for singles and $315,000 for joint filers.
The Bush tax cuts, originally passed in 2001 and 2003, were extended in 2010. They were extended again in 2012 for those making less than $250,000 a year.
Some argue they should also be extended for those making more because many of them are small business owners. In fact, only 3% of small businesses make that much, but that 3% employs 25% of the workforce.
A compromise that was never passed would have extended the Bush tax cuts for these small businesses only. As many as 70% of the wealthy don't own small businesses. If the tax cuts expired for them, it could have reduced the deficit by $700 billion over the next ten years.
In the last decade, the cost of providing health care insurance has skyrocketed for small businesses. The average premiums rose from $5,700 in 1999 to $12,700 in 2009. As a result, only 59% of small businesses offered health insurance benefits. That's down from 65% in 1999.
The Affordable Care Act requires small businesses with 50 employees or more to provide health insurance or they pay a fine. The penalty is $2,000 per employee for all but the first 30 employees. Despite what you might hear, this requirement doesn't hurt most small businesses. That's because more than 96% of such companies already do provide insurance. (Source: Healthcare.gov)
Businesses with fewer than 100 employees can use the state-run exchanges to shop for the most cost-effective plan. Businesses with fewer than 50 employees don't have to pay a fine if their workers get tax credits through the exchange.
Companies with 25 employees or less may qualify for a 50% tax credit. One criterion is that the average annual salary of their employees must be $50,000 or less. Businesses that offer health insurance as a benefit to early retirees 55-64 can get federal financial assistance.
In 2009, the Economic Stimulus Act provided tax credits and funds for small businesses. The TARP program gave $95 billion to community banks for small business loans. In 2010, the federal government gave them another $30 billion that was added to the FY 2011 budget.
How to Invest in Small Businesses
Once a small business starts to do well, it often needs more capital to grow. Many companies decide to access the stock market for that capital. They undertake the arduous process to issue an initial public offering. These stock offerings are only available to large investors. They are very risky because you cannot sell the stock during an initial window of time. If the stock plummets, you must helplessly watch your investment shrink.
It's much easier and safer to invest in small-cap stocks. The advantage is that offer the possibility for healthy growth. Small cap stocks are defined as companies with a market capitalization of less than $2 billion.