NCPA - National Center for Policy Analysis

Licensing Requirements Are Biggest Barrier for Small Businesses

April 9, 2013

Economists have known for years that economic growth and a majority of hiring is driven by small, young and dynamic businesses, not giant firms. With more than half of net private sector originating with small businesses, removing barriers to entry and reforming licensing requirements could lead to increased firm creation and economic growth, say Nathan Allen and Sanders Daniels in The American.

  • More than 91 percent of U.S. businesses have four employees or fewer and the information collected about these firms by the U.S. Census Bureau is minimal because their function and purpose is so broad.
  • New data gathering methods that utilize the power of the Internet are finally making it possible to survey this vast array of small businesses.

The survey, by and the Ewing Marion Kauffman Foundation, asked 7,766 small firms nationwide about the challenges facing their businesses and how local government could remove barriers to growth.

  • Overwhelmingly, the survey respondents reported that professional licensing and permitting requirements are the single biggest challenges for a new firm trying to enter a market.
  • Forty percent of businesses in the survey reported being subject to licensing requirements at more than one level of government.
  • The costs of compliance for small companies can be exorbitant and fees can be thousands of dollars per year to hold a professional license.
  • Beyond money, compliance and professional development require significant amounts of time that are equally burdensome to small businesses.

Besides simplifying professional licensing regulations, local governments should offer effective training and networking programs that would educate potential entrepreneurs on the process of creating a new business. The survey found that the most successful resources for small businesses were inexpensive and focused on professional licensing, tax compliance and organizational documents.

Survey respondents also reported that taxes were less of a concern than licensing requirements, with about 50 percent saying that they were paying the appropriate amount of taxes.  As businesses get larger, they tend to view their tax rate as more unfair. While reforming licensing requirements and providing more education will not create more entrepreneurs by itself, it will lower the barriers and challenges people perceive when starting a new firm.

Source: Nathan Allen and Sander Daniels, "Grow the Economy through Small Businesses," The American, April 3, 2013.


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