Small Businesses and Their Impact on the Economy

Why They Are the Lifeblood of America

small business owner writing prices on menu
Small businesses are critical to U.S. growth.. Photo: Dougal Waters/Getty Images

Definition: 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 (SBA) defines small businesses as follows:

  • Manufacturing and mining industries - 500 employees.
  • Wholesale trade - 100 employees.
  • Retail and service - $6 million.
  • Construction - $28.5 million.
  • Trade contractors - $12 million.
  • Agricultural - $0.75 million.

That's important to know if you are looking for a small business Federal grant or loan.  Most federal agencies, and many state and local governments, use the SBA size standards. You can search for further information and loan opportunities on the SBA website.

How Small Businesses Affect the U.S. Economy

Small businesses are critical to U.S. economic growth. Why? They contribute 65% of all new jobs. Without small businesses, the economy won't grow. The vast majority of companies in the U.S. 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)

Stimulus Spending

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. For more, see Stimulus Money for Small Businesses.

Tax Cuts

The Bush tax cuts, originally passed in 2001 and 2003, were extended in 2010. They were extended 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. However, that 3% employs 25% of the workforce. A compromise is to extend 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 expire for them, it could reduce the deficit by $700 billion over the next ten years. For more, see Extend Bush Tax Cuts for Small Business Owners.

Obamacare

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 offer health insurance benefits, down from 65% in 1999.

Small businesses with 50 employees or more are required by Obamacare to provide health insurance or they may have to pay a fine. The penalty is $2,000 per employee for all but the first 30 employees. However, 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 an exchange.

Although they aren't required to, companies with 25 employees or less may qualify for a 50% tax credit. One criterion is the average annual salary must be $50,000 or less. To find out how to qualify, go to Small Business Tax Credit.

Businesses that offer health insurance as a benefit to early retirees 55-64 can get Federal financial assistance. Find out how at ERRP.

Investing 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 (IPO). Many people like to invest in these small  cap stocks because they offer the possibility for healthy growth. Small cap stocks are defined as companies with a market capitalization of less than $2 billion. 

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