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Is Regulation Really Strangling Start-ups, and How Much Would the JOBS Act Do to Keep It Under Control?

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Here are two facts that should be attracting a lot more attention than they are.
  • Over the last decade, nearly two-thirds of new jobs in the U.S. economy came from businesses less than five years old. That's a big hint on how to rev up job creation.
  • Opening up an ice cream parlor in San Francisco can cost $20,000 in fees and include a 2-year wait for the city to approve permits. All the while, the owner is incurring rent and other expenses while waiting for the powers that be to say it's OK for the business to operate.
According to the New York Times, Juliet Pries, the owner of The Ice Cream Bar, had to hire a lawyer and pay $11,000 to get the water turned to make it through San Francisco's marathon approval process. Her business is up and running now and she has 14 employees.

That one owner persisted where others might have failed is a small step forward on job creation, but her experience raises the question of exactly who benefits by making the process so slow, cumbersome, and difficult.

A lot of people try to make this issue simple: It's government regulation versus business start-ups and job creation. That's the way the issue is being framed in the debate over the JOBS Act, designed to exempt "emerging companies" from certain financial disclosure requirements, while opening the door to online "crowd financing."

But the reality is that for many businesses, such as The Ice Cream Bar, the problem isn't about Sarbanes-Oxley, where the debate has been largely defined by lobbyists, and mostly lobbyists for big businesses that can take care of themselves. The reality of regulation demands a more careful assessment of what's wrong and a set of well-thought-out remedies. Here are some points to consider.

  • It's not all about Washington. In the simplistic world of political campaigns, Washington is the mega-villain. But the truth is that most businesses, small businesses in particular, spend a lot more time dealing with other levels of government. Most states require someone starting a business to get a license. If you're in a specialized field, whether you're an accountant, barber or mortician, you probably need occupational licenses, as well. If you're hiring people, you need unemployment insurance, and depending on what you're selling and where, you may need a license to sell your product and another to charge your customers sales tax. Local governments often require environmental, health, building and other permits, and you'll have to obey zoning laws as well.
  • Is regulation the problem or is it its complexity? Just about every regulation starts for a legitimate reason -- and sometimes, sadly, they emerge from horrific tragedies like New York City's Triangle Factory fire. No one wants unsafe buildings where workers are in danger. But sometimes even good regulations seem to go bad. New York City has a seven-step process for getting a building permit -- one that's replete with admonitions to file under "Directive 14" or "Directive 2" and consult other documents and agencies. In Step Number 5, the department "perforates the plan."Apparently, when you're nearing the end, you need to bring your folder to the "Record Room," where the "Record Room clerk perforates the plans and forms and returns them to the applicant." Then you microfilm the plans, and return them to the Record Room so they're "now ready for permit." OK, we're bewildered (And are they actually still using microfilm?) We certainly invite New York City's Record Room clerk to weigh in and explain it to us.
  • Maybe some periodic housecleaning is in order. Every regulation exists for a reason, usually a good one. But the reasons change long before the regulations do. Maybe we need to start thinking about a regular review process, either allowing regulations to sunset or requiring a re-examination every 10 or 20 years. And we need to look at the accumulated impact on businesses and employers, along with the need to protect employees, consumers, and the public in general. At the federal level, businesses have to comply with a whole host of regulations ranging from the Fair Labor Standards Act to OSHA to the Family and Medical Leave Act to Veteran's Preferences. Each one fulfills a mission most Americans support, but each is also detailed and complex. Taken together -- well, this is why there's a thriving market for compliance officers.

The problem with regulation is that it all adds up, and no one is really in charge of looking at the full sweep of regulation an industry faces and seeing whether it's reasonable or not. Whether regulation is hampering business and stymieing job creation is just as important as whether the public interest is being served and what would be lost if the regulations were rolled back or pruned.

In the end, there's not much point worrying about the issues surrounding complex federal laws while still making small business owners run around City Hall with folders of perforated papers looking for someone who still handles microfilm processing.

Around the Web

Understand Business Law & Regulations | SBA.gov

Small Business Size Regulations | SBA.gov

Federal Acquisition Regulations (FAR) | SBA.gov

Small Businesses Are Hit Harder by Regulations