Frequent Questions

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; see 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 annually over 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 asscientists, 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 (Research Summary #211); Federal Procurement Data System; Advocacy-funded research by CHI Research, Inc.(Research Summary #225); 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 businessesin 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 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.

Starts and Closures of Employer Firms, 2000–2004

Category 2001 2002 2003 2004 2005

New Firms 585,140 569,750 612,296 642,600e 544,800e

Firm Closures 553,291 586,890 540,658 544,300e 544,800e

Bankruptcies 40,099 38,540 35,037 34,317 39,201

e=Estimate. For more information, see "Business Estimates from the Office of Advocacy: A Discussion of Methodology", a working paper by Brian Headd, June 2005 (Research Summary #258).
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 shed 994,667 net jobs. For a more complete look at employment dynamics by firm size from 1989 to 2003, see www.sba.gov/advo/research/data.html#us.

Source: U.S. Bureau of the Census.

What is small firms' share of employment?

The small business share of employment remains around 50 percent. Although small firms generally create 60 to 80 percent of the net new jobs, some firms will become large firms as the new jobs are created. Of 113.4 million nonfarm private sector workers in 2003, small firms with fewer than 500 workers employed 57.4 million and large firms, 56.0 million. Smaller firms with fewer than 100 employees employed 41.0 million.

Source: U.S. Bureau of the Census.

What is the survival rate for new firms?

Two-thirds of new employer establishments survive at least two years, and 44 percent survive at least four years, according to a recent study. These results were similar for different industries. Firms that began in the second quarter of 1998 were tracked for the next 16 quarters to determine their survival rate. Despite conventional wisdom that restaurants fail much more frequently than firms in other industries, leisure and hospitality establishments, which include restaurants, survived at rates only slightly below the average. Earlier research has explored the reasons for a new business's survivability. Major factors in a firm’s remaining open include an ample supply of capital, being large enough to have employees, the owner’s education level, and the owner's reason for starting the firm in the first place, such as freedom for family life or wanting to be one’s own boss.

Sources: "Survival and Longevity in the Business Employment Dynamics Database" by Amy E. Knaup, Monthly Labor Review, Volume 128, Number 5 (May 2005), pp. 50-6; "Redefining Business Success: Distinguishing Between Closure and Failure" by Brian Headd, Small Business Economics, Volume 21, Number 1 (August 2003), pp. 51-61.