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It’s a record breaking season for new businesses. The IRS received nearly 5.4 million business applications in 2021 — the most since the U.S. Census began reporting business formation statistics in 2004. The report shows that there will be nearly 1 million more new business apps in 2021 than in 2020. A record-setting year.
The first half of 2022 was slightly behind last year, with 2.5 million applications through June compared with 2.8 million in the same period last year. Although growth has slowed, entrepreneurs have still started many businesses in recent years.
Small businesses employ more than half of the U.S. workforce, so more increases can boost the economy and build more resilience. The real test, however, will be how many apps actually convert into businesses with payroll. Stecker examined the U.S. Census Bureau’s business formation statistics to examine trends in new business applications, including timelines, industries, geographies, and whether they can grow to add jobs to the U.S. economy. Stecker looked at seasonally adjusted US data from 2004 to June 2022.
New business applications are on the rise.
Recessions often spur new businesses, but the boom in the pandemic recession was deeper than anything seen since the longest recession in 2008. For reference, it took 2009 to 2016 (about seven years) for business applications to increase by 22 percent, but applications grew more than that in both 2020 and 2021.
Several factors contributed to this upheaval. Unprecedented layoffs in spring 2020 have left many people looking for new forms of income. Increased unemployment benefits and pandemic stimulus checks meant people had more money to invest in their ideas and sustain themselves as their new ventures gained traction. And for homeowners, the sharp rise in home prices meant they had access to more startup capital.
In other words, entrepreneurs finally had the reasons and resources to test their business ideas.
Retail leads in apps.
The most innovative business apps that have led all industries since 2016 are in retail.
As retail stores temporarily closed, boarded up their windows and laid off workers, more retailers moved in, according to data from the Bureau of Labor Statistics. Many of the new retailers were sole proprietors—primarily individuals selling their own goods online—or were replacing stores that closed during the pandemic.
In addition, some retail subcategories, including online stores, food and beverage stores, and hobby stores, saw sales growth in 2020. Online shopping, in particular, gained popularity amid restrictions on businesses and gatherings during the Covid-19 outbreak, and sales have continued to grow ever since, according to the Census’s quarterly e-commerce reports.
As of April, retail employment increased 18 percent compared to the same month in 2020 and was even slightly higher than April 2019, BLS data showed.
Transportation, storage and retail applications have grown exponentially.
Retail was among the leaders in business application growth between 2019 and 2021, but did not expand as quickly as transportation and warehousing. The same reliance on online shopping that has fueled new retail businesses has pushed transportation and warehousing forward because getting goods into people’s hands requires better pipelines.
The biggest growth was in undistributed businesses, which went from 52,000 to 144,000 applications.
Wyoming and Delaware remain leaders in commercial applications.
Most of the country saw the same number of new business applications per capita in 2021, just a few more. Wyoming was the most popular, with 58 applications per 1,000 people. Stecker has highlighted Wyoming’s leadership in the past, citing the state’s tax-friendly policies and an influx of out-of-state investment and new residents. According to the Wyoming Business Council, its primary industries include natural resources, tourism/outdoor recreation and agriculture. But the council is working to support new industries in the state, including professional services, technology and advanced manufacturing.
Delaware was close behind with 45 new business applications per 1,000 people. The number of businesses incorporated in Delaware exceeds 1 million, including more than two-thirds of the Fortune 500 companies. Incorporating in Delaware can take less than an hour, and the state offers a special corporation court to expedite business trials. Other leading states include Georgia (30 new business applications per 1,000 people) and Florida (29).
The higher the rate, the less likely it is for businesses to develop payroll
In 2020 and 2021, the number of applications that will be converted to businesses with payroll increased. The census determines whether or not an application with payroll can be developed into a business by looking for certain characteristics, including a plan to hire employees, pay the first salary on a scheduled date, a certain set of industries, and whether the application comes from a corporate body. The number of applications with proposed salary increased compared to previous years, but did not reach record levels.
However, as a share of overall business applications, both statistics have declined. In the year In the first half of 2022, only 32 percent of business apps were considered to be converted to businesses with payroll, compared to 58 percent in 2005. Since then, the rate has been steadily decreasing. The same is true for salaried businesses, which comprised 35% of applications in 2005, but only 11% of applications in 2022.
That is, the number of jobs for a new company is small, which limits the economic impact of those new businesses. Many applications come from self-employed individuals who are probably laid off and looking for new ways to grow their business, rather than entrepreneurs with long-term dreams.
Future data and analysis will reveal more behind the growth in app growth, including how many apps continue to be used by employees to establish businesses and how that number compares to the number of businesses that closed during the pandemic.
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