What role do small businesses play in the economy?

Small business development in the US declined in the four decades before the pandemic — but since 2020, this chunk of the private sector has been driving the bulk of job growth.

What’s considered a small business?

The Small Business Administration (SBA) generally defines any independent business with fewer than 500 employees as a “small business.”

How many small businesses are there in the US?

Small businesses are 99.9% of all businesses in the US. As of July 2024, there are 34.8 million small businesses compared to 19,688 large businesses.

These small firms employ 59.0 million people, or 45.9% of all private-sector employees, and are responsible for 61.1% of overall job growth since 1995.

Since small businesses make up almost all of all businesses, the demographics of small businessowners will essentially match those of all businessowners. The latest data compiled by the Small Business Administration says that women own 39.4% of all businesses, including 21.6% of firms with employees. White entrepreneurs own are 79.3% of businesses, while Black entrepreneurs own 11.0%, Hispanic entrepreneurs 14.5%, and Asian entrepreneurs 9.3%.

How much has entrepreneurship increased?

Soon after the start of the pandemic, new business applications spiked. Business applications rose by nearly 25% in 2020 — from 3.5 million to 4.4 million compared with 2019, a historic high.

The number of applications has remained high: In 2021, they hit 5.4 million before tapering to about 5.1 million in 2022. In 2023, applications set a new record high at 5.5 million. In the first 10 months of 2024, people submitted 4.3 million applications.

A subcategory of business applications called “high-propensity” applications refers to businesses with a high likelihood of having a payroll, meaning the business plans to hire employees and pay wages.

According to Census Bureau data, applications for high-propensity businesses hit highs in 2021 at 1.77 million and again in 2023 at 1.78 million after a down year in 2022. As of October, 1.4 million applications had been submitted in 2024, about 75,000 shy of the year-to-date total in October 2023.

Economic forces like heightened inflation have introduced some volatility to the small business landscape since the pandemic. But in 2024, the numbers of both general and high-propensity applications remain higher than pre-COVID levels.

How do small businesses impact the economy?

Despite the size and impact of the small business sector, data collection around small business activity is limited, according to the Bureau of Economic Analysis.

Large businesses grew faster and accounted for the majority of gross domestic product (GDP) between 1998 and 2014, per a summary of research on small businesses and GDP from the SBA. Small businesses’ share of GDP fell during this time — but they still accounted for 43.5% of economic activity in the US in 2014.

The Congressional Budget Office notes that small businesses also contribute to the economy by driving productivity and generating competitive pressure that forces larger businesses to innovate.

How does the government support small business activity?

The federal government has a history of supporting entrepreneurs to stimulate the small business economy. The SBA is a cabinet-level agency that provides support for small businesses through programs like the Small Business Innovation Research and Small Business Technology Transfer programs, which provide a government-funded seed pool for small businesses and startups.

During the COVID-19 crisis, the American Rescue Plan also provided small businesses with tax credit programs and Paycheck Protection Program loans.

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