The State of Small Business? Depends on Who's Talking

Last Updated Jan 13, 2011 2:03 PM EST

Are these the best of times or the worst of times for small business?

It depends on who you ask.

Few people looking for a happy-news take on the day's events turn to Forbes, but if you visited the site recently you would have found something approximating just that. Blogger and small business mentor Ali Brown wrote, "On the ground, I am personally seeing more people starting businesses than ever before, through my work as a mentor and coach with hundreds of business owners a year."

To be fair, Brown notes that some entrepreneurs feel neglected by federal policymakers, despite the passage last year of a raft of tax breaks targeting small business. She also reports on recent surveys measuring a dip in small business optimism. But her takeaway seems to be that entrepreneurial success in 2011 depends largely on attitude. "While we may not be able to get the lending we want, sales may be slow, and the finances may look hairy for some, it comes down to choosing to move forward," Brown says.

Fewer entrepreneurs are making that choice, it appears, according to an analysis of recent jobs data by Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, a Washington business association. Keating notes that from December 2009 to December 2010 the number of self-employed slid by 336,000. And the fall continued the last three months of 2010.

"Public policy has been the major negative, where uncertainty has hampered confidence, entrepreneurship, and investment over the past three years," Keating says. "If we now move into a period of political gridlock, that may be an improvement." But worry about the impact of national healthcare legislation and financial industry overhaul may keep entrepreneurs on the sidelines, he says.

Perhaps they will only stay on the sidelines part-time. That's what entrepreneurship scholar Scott Shane suggests in his examination of sole proprietor tax returns. Shane studied IRS data showing net income on the average schedule C fell more than 7 percent in 2008, the latest year for which reports are available.

That provides a high-level view of how the first year of the recession affected small businesses, about three-quarters of which are sole proprietorships. It also continues a trend dating back much further, Shane says. The 2008 drop was actually the third straight annual real-dollar decline in the average sole proprietor's income. Not only that, Shane says, the figure generally has been falling since the 1980s.

While sole proprietors' income may be falling, Shane doesn't think the sky is. His explanation for the trend is that more people are starting part-time businesses that tend to have lower average revenues as well as profits. Over the last three decades, he says, the per capita number of Schedule C filings has nearly doubled, indicating a lot more people are starting businesses. Meanwhile, however, the percentage of the labor force claiming full-time self-employment actually declined.

With both the number of the self-employed and their average incomes declining, and with even small business coaches hard-pressed to justify optimism, how are entrepreneurs handling it? Right now, it seems that "Don't quit your day job" is the business strategy of the day.

Mark Henricks has reported on business, technology and other topics for The New York Times, The Wall Street Journal, Entrepreneur, and other leading publications long enough to lay somewhat legitimate claim to being The Article Authority. Follow him on Twitter @bizmyths.

Image courtesy of Flickr user jronaldlee, CC2.0

  • Mark Henricks

    Mark Henricks' reporting on business and other topics has appeared in The Wall Street Journal, The New York Times, The Washington Post, Inc., Entrepreneur, and many other leading publications. He lives in Austin, Texas, where myth looms as large as it does anywhere.