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Frequently Asked Questions About Small Business in the United States. Answers provided by the U.S. Small Business Administration's Office of Advocacy, June, 2006.

What is a small business?

The 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 U.S. Small Business Administration (SBA) Office of Size Standards. These standards vary by industry; for size requirements related to a specific industry, see: http://www.sba.gov/size.

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

Small firms:

• Represent 99.7 percent of all employer firms.
• Employ half of all private sector employees.
• Pay more than 45 percent of total U.S. private payroll.
• Have generated 60 to 80 percent of net new jobs annuallyover the last decade.
• Create more than 50 percent of nonfarm private gross domestic product (GDP).
• Supplied more than 23 percent of the total value of federal prime contracts in FY 2005.
• Produce 13 to 14 times more patents per employee than large patenting firms. These patents are twice as likely as large firm patents to be among the one percent most cited.
• Are employers of 41 percent of high tech workers (such as scientists, engineers, and computer workers).
• Are 53 percent home-based and 3 percent franchises.
• Made up 97 percent of all identified exporters and produced 28.6 percent of the known export value in FY 2004.

Sources: U.S. Bureau of the Census; Advocacy-funded research by Joel Popkin and Company, Jan. 2002 (see this PDF from SBA.com); Federal Procurement Data System; Advocacy-funded research by CHI Research, Inc., Feb. 2003 (see this PDF from SBA.com); Bureau of Labor Statistics, Current Population Survey; U.S. Department of Commerce, International Trade Administration.

How many small businesses are there?

In 2005, there were approximately 25.8 million businesses in the United States, according to Office of Advocacy estimates. Census data show that there were 5.8 million firms with employees and 18.6 million without employees in 2003, the most recent year with data. Applying the sole proprietorship growth rates to the nonemployer figures and similar Department of Labor growth rates to the employer figures produces the 25.8 million figure. Small firms with fewer than 500 employees represent 99.9 percent of the 25.8 million businesses (including both employers and nonemployers), as the most recent data show there are nearly 17,000 large businesses.

How do regulations affect small firms?

Very small firms with fewer than 20 employees spend 45 percent more per employee than larger firms to comply with federal regulations. These very small firms spend 4� times as much per employee to comply with environmental regulations and 67 percent more per employee on tax compliance than their larger counterparts. For data broken down by industry, see this PDF from SBA.com.

How many businesses open and close each year?

Estimates for businesses with employees indicate there were 671,800 new firms and 544,800 closures (both about 10 percent of the total) in 2005.

For more information, see Business Estimates from the Office of Advocacy: A Discussion of Methodology, a working paper by Brian Headd, June 2005 (see this PDF from SBA.com).

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

How many new jobs do small firms create?

Over the past decade, small business net job creation fluctuated between 60 and 80 percent. In the most recent year with data (2003), employer firms with fewer than 500 employees created 1,990,326 net new jobs, whereas large firms with 500 or more employees