Boldness of Enterprise
Ever since its founding, the spirit of entrepreneurship observed by Alexis de Tocqueville in the nineteenth century has flourished in America. In his seminal treatise “Democracy in America” published in 1835, the renowned French aristocrat and philosopher noted that "boldness of enterprise is the foremost cause of [America's] rapid progress, its strength, and its greatness."
Almost two centuries later, that spirit appeared to be faltering. One noteworthy 2016 study summarized the accumulating evidence on declining business vigor in the US. But, it was mute on the causes. The factors sapping entrepreneurial vigor remain hidden. Of course, not all sectors of the economy have experienced this decline. Innovation and social changes have given us entirely new industries and business paradigms. Social media and an array of advanced digital technologies have arisen in the new millennium. Nevertheless, there were disturbing indications that the US was losing its competitiveness. In some sectors, such as manufacturing, it had already fallen far behind.
Business Starts Hit a 13-Year High
Perhaps, we may be entering a new phase. The number of people in the US starting their own businesses has hit a 13-year high. The trend has caused NPR to announce a startup boom and prompted The Wall Street Journal to question the mental health of the founders. By the end of September 2020, applications for an Employer Identification Number (EIN), required for new businesses, had exceeded 2019 volume by 18%. Most of the new entrepreneurs appeared to have made their debut in the second half of the year. The third quarter saw a record 1.5 million applications.
Of special interest are applications the Federal Reserve refers to as High Propensity Business Applications. These are applications that are most likely to result in businesses that need workers. High-propensity applications include applications that are:
- For a corporate entity
- Indicate they are hiring employees, purchasing a business, or simply changing the organizational type
- Provide a first wages-paid date (planned wages)
- Have a NAICS industry code in manufacturing, retail stores, health care, or restaurants/food service (NAICS is the North American Industry Classification System for business entities.)
Tax returns filed for LLCs increased by over 14,000 percent over the two decades from 1993 to 2015, a far higher rate than those filed for non-farm sole proprietorships (59%), partnerships (153%), or corporations (54%).
LLCs offer business owners many advantages. Chief among them is the protection of personal assets from business liabilities. An LLC member’s liability is limited to the amount they have invested in the business. Additionally, members of an LLC can elect to have the LLC treated as a pass-through entity or a taxable entity for income tax purposes. Depending on the number of members, an LLC can be treated as a sole proprietorship, partnership, C-Corporation or S-Corporation. An LLC can also be formed and governed with a minimum of legal requirements.
High-Propensity Business Applications
The Federal Reserve Economic Data (FRED) chart below shows the pattern of high-propensity business applications from the third quarter in 2004 to the end of 2020. For seven consecutive quarters — Q1 2006 to Q3 2007 — the number of applications stayed above 387,000 per quarter. Following that, they fell drastically; the start of the decline coincided with the Great Recession’s onset (indicated on the chart by the grey area).
Yet, despite the longest economic expansion on record — 128 months — since then, the volume of applications never attained pre-financial crisis levels. Until June 2020, that is, when the coronavirus was crippling economic activity. Indeed, the highest level during that time was the 330,703 applications received in Q1 2018.
However, the volume of applications spiked in Q3 2020 at 537,930. In Q4 2020, it was 373,740.
The year 2020 was strange in many ways. Despite the toll inflicted by the spread of the virus, economically, the country seemed to be sliding through. Thousands of businesses were forced to shut down, hundreds of thousands lost their jobs, and the GDP fell. Yet, the stock markets, after plunging in March 2020, have kept climbing since then.
The investors that populate the capital markets appear to be stubborn optimists. In light of their behavior, the revival of entrepreneurial endeavors does not seem so surprising. But, what’s causing it?
What’s Causing the Spike in Business Starts?
The spike in applications may have been driven by the convergence of several factors. The closure of thousands of small businesses could have signaled an opportunity for newcomers. Also, some Americans have managed to weather the coronavirus storm remarkably well. They have kept their jobs and increased their personal savings, boosted in part from federal stimulus funds but also by spending less. It’s possible, however, that this was simply a case of workers who lost their jobs seeking alternative ways of earning income.
The growth of the gig economy has exposed millions of Americans to the idea of being an independent contractor. In truth, there is hardly any distinction between an independent contractor, a sole proprietor, and, in many instances, a small business owner. The virtues of such status include being your own boss and the possibility of income that is limited only by your ingenuity. There is nothing quite as motivating as the opportunity to improve your financial position. In the end, it all comes back to Tocqueville’s observation of how America achieved its economic dominance in the first place.
About the Author
Anthony is the owner of Kip Art Gifts, an ecommerce store that specializes in art-inspired jewelry, fashion accessories, and other objects. Previously, he worked as an accountant and financial analyst. He enjoys writing on small business, financial intermediation, and economics. Anthony was educated at Wilson’s School and the London School of Economics and Political Science.