While big businesses may command many of the headlines, small businesses are really the engine that drives much of American economy. Beyond sheer numbers, small businesses provide jobs for many individuals who might otherwise be shut out of the workforce because of disability, discrimination or other factors.
What Is a Small Business?
According to the Small Business Administration (SBA), a small business in the United States is defined as a company of 500 or fewer employees, excluding nonincorporated sole proprietorships. Different size standards according to industry apply for companies that wish to be considered as government contractors. Small businesses tend to be localized; however, this is not always the case, nor is it a necessity according to the criteria set by the SBA. In 2007, small businesses represented 99.9 percent of the 27.2 million businesses in the United States, according to the SBA.
According to the SBA, small businesses employ approximately half of all private sector workers in the United States. Small businesses also employ 40 percent of high-tech workers and create more than half of nonfarm private gross domestic product (GDP). Since the mid 1990s, between 60 and 80 percent of all new jobs were created by small businesses. The SBA reported that in 2005 alone, small businesses created 979,102 net new jobs (almost 79 percent) versus 262,326 net new jobs created by large firms.
Small Business and Opportunity
Small businesses, primarily start-ups, tend to increase in number during a recession, as many workers who have lost their jobs turn their backs on the job market or give up in their attempt to seek a position in another company. This is especially true for business owners and entrepreneurs of color, women, mid-career workers and people with disabilities. Workers from these groups traditionally find it more difficult to navigate the job market, especially during tough economic times, leading them to strike out on their own in entrepreneurial ventures.
Small Business and Innovation
According to the SBA, small businesses garner 13 times more patents per employee than large firms. Moreover, the patents from small businesses are twice as likely than those from large firms to be among the one percent most cited. Small businesses tend to have fewer layers of bureaucracy, which often allows them to be more responsive to market forces and able to take advantage of innovations in technology.
Small Business and the Economy
The number of small businesses tends to increase during tough economic times. According to the SBA, during the recession period between 1990 and 1992, 1,068,124 small businesses closed their doors. However, 1,085,737 new businesses were created during the same period, resulting in a net gain of 17,613 businesses. While more businesses ceased operations than were launched in the recession year of 2001, the trend was reversed in subsequent years despite the lingering weak economy. From 2002 to 2003, there was a net gain of 54,498 small businesses.