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Small Business and the Simple Math of Job Creation

Sep 13, 2011 | Updated Nov 13, 2011

There is a realistic solution for creating jobs and turning around our country and it lies with small businesses. Let's talk "simple math," as President Obama noted in his remarks just a few days ago, but my version of simple math has a both a view of the numbers and an outcome that's a bit different.

According to the US Small Business Administration, citing the most recent Office of Advocacy and Census data, there are:
•27.5 million small businesses in the US (of these, about 6 million have employees and 21.4 million are "Solopreneurs" or businesses with no employees);
•18,311 business with over 500 employees

The historical unemployment rate is about 4-5%, but just to illustrate how important small businesses are to turning around this economy, consider the following extremely "simple math". With 14 million people unemployed currently, this means that:

•If one out of every two small businesses (50%) hired just ONE person, we would have zero unemployment;
•If each of the 6 million small businesses that has employees hired just two people, we would only have 2 million people unemployed in the US (1.3% unemployment);
•In contrast, business with more than 500 employees would need to hire an average of 655 people each to get to hire the same 12 million employees (i.e., to achieve 2 million people unemployed)

What's a more reasonable strategy? Helping the small businesses of this nation to grow modestly by hiring one to two people or trying to get big business to take on massive acceleration in their hiring?

In reality, there needs to be a combination of both, but you cannot ignore the power of what strengthening small business can do for the United States and how completely critical they are to our economy.

Unfortunately, what we have heard about the American Jobs Act proposed by President Obama thus far doesn't fully accomplish this. Neither does the US Chamber of Commerce letter nor the Believe in America plan proposed by Governor Romney.

As a small business influencer and advocate, I have been on the front lines talking to small business owners about what they need for the past several years and what they are saying they need today is no different than what they needed 12 months ago. I believed (as I discussed on MSNBC's Your Business at the end of 2010) that we wouldn't have a recovery in small business this year because of what I had been hearing and continue to hear from the community. So, I want to clarify what small businesses need and what the government needs to do to make the small business math work.


Small businesses need permanent, not temporary, solutions

Small business owners do not have the luxury of making mistakes. Many are working on reasonable margins that if disrupted affect their ability to take home money to their own families. Therefore, small business owners are cautious and think not just about today, but also about tomorrow, when making decisions about their businesses.

This means that small businesses need certainty and permanence in the operating environment. Proposed solutions like extending the temporary payroll tax cut and first year expensing incentives (as proposed by President Obama's American Jobs Act) or a one-time, low dollar amount hiring credit aren't enough to influence a small business owner- it's just too risky. In fact, we know temporary solutions like the payroll tax cuts and one-year expensing incentives won't work because they didn't work the last time. It's too small in scope and short-term in nature for a small business owner to hang his or her hat on.

There are also far too many temporary tax rules and other legislation that are re-evaluated every year. The small business owner, who blurs the line everyday between his personal and professional life, needs certainty. This means the government should lay out the rules of the game and stop changing them. And to maximize participants, those rules should be as easy to understand and follow as possible.

Moreover, what will influence small business owners to hire would be simplifying the tax code and lowering tax rates for small business owners. Many of the Solopreneurs I spoke with and who responded to queries that I put out on various social media platforms, including Howard Greenstein of Harbrooke Group, wanted to see a permanent lowering or elimination of the self-employment tax as a means to be able to invest in their businesses.


Small business owners need to focus on running their business, not pushing papers

It is clear that those proposing solutions have either never been a small business owner or haven't for quite a long time, because they do not seem to comprehend the amount of administrative work- work that is unproductive and does not generate revenue- that's currently part of a small business owner's duties. For Solopreneurs (as noted above, representing over 21 million small businesses), the amount of additional administration that is required to bring on just one employee is daunting. It requires additional compliance, regulation, forms and headaches.

There are several fixes to this issue. One is to expand the definition of an independent contractor (or 1099 workers) so that small business owners can hire more individuals. If you are not familiar with the difference, per the IRS, "Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors." Anyone can see how that creates a barrier to taking on employees, especially for small business owners. If both parties are in agreement that an independent contractor arrangement makes sense, why would the government stop that? To do so is an impediment to growth for small businesses.

Also, expanding the 1099 definition can encourage individuals to start more businesses. It may be that a small business only needs a person for projects or for part of the year, and having a more lenient 1099 definition would allow an independent contractor to be able to be employed by multiple businesses without having an increased redundancy in administrative work and other paperwork.

Another solution is to eliminate in some cases and minimize in others regulations for small businesses. While many of the proposed plans did talk of streamlining of regulations, the ones that have been discussed (such as EPA regulations) aren't relevant to the majority of small businesses. Small businesses should not have to be subject to regulations that hinder their ability to conduct business, grow and hire.


Small business owners need to have certainty regarding the cost of doing business

Healthcare and other costs are top of mind for small business owners. The current health care regulation ("ObamaCare" as it's "fondly" called) is of concern to many small business owners. They are worried that it will not lower healthcare costs and that it actually will make doing business more expensive over time. While the spirit of this regulation had its heart in the right place, the reality of the regulation creates a penalty for growth- the bigger you are, the more you pay. That type of regulation that creates disincentives for growth is completely counter-intuitive. The government should repeal this Act as it is having a direct and indirect effect on growth for small business owners.


Small business owners need access to capital

Today's small business owner is being crippled by another problem; access to capital. If small business owners cannot grow their business, they cannot hire more people. Without the ability to secure equity or debt capital on a regular basis, small business owners are consistently faced with the choice of investing in their business or taking money out of their businesses to pay for their living expenses. Without the ability to access the capital required to invest in their business, growth will not happen. The American Jobs Act does address this point in principle, so let's hope the execution is as strong as the intent and that it is a priority part of any plan, not simply an aside.

Certainly reviving the economy is an incredibly complicated issue and the most important part of small businesses growing and hiring is more customers patronizing their businesses, which requires consumer confidence. Other parts of the economy, including the state of the housing market, also affect this. However, we can agree that a major shift in jobs and unemployment should have a positive effect on consumer confidence and that having 28 million small businesses in this country that only need to hire an employee or two on average to completely reverse unemployment is a strong opportunity that must not be ignored.

To recap, our government should seriously consider policies that will truly impact small business owners, including:
-Creating certainty and confidence through permanence in our tax code
-Lowering tax rates and streamlining the tax codes
-Expanding the definition of an independent contractor so businesses can hire more 1099 workers
-Simplifying and eliminating rules and regulations of note to small businesses
-Create long-term hiring incentives
-Repealing the Affordable Care Act
-Fostering reasonable access to capital for small businesses

The math really is simple, but we need to have the right equation. Small business is the critical input in that equation and it needs our focus and attention.