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Kristie Arslan

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Five Big Myths About American Small Businesses

Posted: 05/24/11 02:53 PM ET

Politicians on both sides of the aisle have been struggling to stimulate the economy and put a definitive end to the Great Recession. These efforts have included sector-specific bailouts, cash for clunkers and the American Recovery and Reinvestment Act of 2009, which helped some notable companies and stimulated some industry sectors, but most of these efforts provided little benefit to the typical American business.

Last week, the Obama administration recognized the contributions of this important business demographic with its National Small Business Week. It's worth challenging a few of the myths about the American small business landscape -- as they are truly the engine of the economy.

1. Most Americans work for large corporations

Conventional wisdom used to hold that what's good for General Motors is good for America. While GM may no longer be the poster child for corporate America, large corporations can afford lobbyists who make sure their clients are first in line when legislation is drafted. One of the justifications in protecting the interests of corporations first is the notion that they employ the vast majority of Americans and that corporate interests are necessarily aligned with most workers'.

But large businesses only employ about 38 percent of the private sector workforce while small businesses employ 53 percent of the workforce. In fact, over 99 percent of employing organizations are small businesses and more than 95 percent of these businesses have fewer than 10 employees. The reality is that most Americans are employed by a very small business that has little in common with the tiny sliver of the business demographic represented by corporate America.

2. Job growth is driven by large employers

Since most of us read about the handful of large employers in the business pages on a regular basis, we often assume that job creation depends on their success. While corporations do employ many Americans, small businesses account for 64 percent of net new jobs created. Many of these new jobs are also new companies -- the startup rate in 2010 was the highest it has been in 15 years, according to the Kauffman Index of Entrepreneurial Activity. More than half a million new businesses were created in 2010 as the poor economy and high employment rates have led more individuals into business ownership.

Historically, small businesses grow faster than their large counterparts, too. The average growth rate of a large company with more than 500 employees over the decade ending in 2006 was about 1.3 percent. In that same period the growth rate for America's smallest businesses, the self-employed, was 3.4 percent. As small businesses grow, they hire employees, buy goods and services from other businesses, contribute to the local tax base and support individuals and their families.

3. Lending is readily available for small businesses in large and small amounts

When President Obama signed the Small Business Jobs Act last May, much attention was paid to the $30 billion Small Business Lending Fund that would be made available to community banks, credit unions and community development funds. This funding helped address the fact that neither the Troubled Asset Relief Program (TARP) funds nor industry bailouts specifically helped small businesses. Although the $30 billion in lending was authorized eight months ago, the Treasury Department has yet to distribute these funds, which means the community banks have not been able to boost small business lending as the legislation intended.

Further complicating the lending picture is the fact that self-employed business owners most often need what would be considered a "micro" loan to any lending institution, including a community bank. A business owner may only need $5,000 to invest in new office equipment or marketing efforts, but loans in such small amounts are not readily available through small business lending programs. Instead, this business owner has to use a personal credit card to make the investment, which typically has much less desirable terms and interest rates than a small business loan. What self-employed business owners need is recognition that these small loans are just as vital to business success as the larger loans that are supposed to be readily available.

4. Self-employed business owners get all the same tax benefits as larger businesses

Businesses have a seemingly infinite ability to "write-off" certain expenses on their corporate tax returns, right? But what about business owners who file individual tax returns, as most self-employed businesses do? It turns out there are fewer tax perks for the self-employed business owner. For example, corporations are able to claim health insurance policies for employees as a business expense and their employees pay for those policies with pre-tax dollars. A self-employed business owner could have claimed tax relief for purchasing health insurance last year, thanks to a one-year self-employed health insurance tax deduction in the Small Business Jobs Act, but will have to go back to paying full freight with no tax relief next year, unless Congress decides to make the deduction permanent.

Even the tax perks specifically created for self-employed business owners can be a challenge. Taxpayers who work from home are entitled to take a home office deduction, but about 60 percent of those eligible for the deduction don't take it. One reason is that many taxpayers have heard that taking this deduction will create an audit risk, which may have been true once but was largely addressed by tax changes made in the late 1990s. The other reason for the low participation rate is that the deduction is notoriously difficult to calculate. Congress is considering solving this problem by creating a standard home office deduction, which would certainly keep more business owners from leaving money on the table when it comes to tax relief.

5. Being self-employed is not a "real" job

One of the most frustrating myths that self-employed business owners face is the near-universal lack of understanding about their business demographic among policymakers. The many millions of self-employed and micro businesses are rarely "hobby" enterprises or a last ditch effort to prevent being unemployed.

Being your own boss means you have created a job for yourself and have prevented one more individual from showing up on the unemployment rolls. As the unemployment rate edged back up to 9 percent in April, more individuals may be considering creating a job for themselves. These jobs are just as valuable to the economy as an office or factory job. This dynamic business demographic contributes about $1 trillion to the economy every year -- no myth.

 

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