We Need New Small Businesses

April 2, 2009

It is often said that small business is the backbone of our economy. According to the U.S. Small Business Administration, small business employs half of all private sector employees. Over the past decade, small business has produced between 60 and 80 percent of net new jobs. We need small businesses to prosper and lead us out of the economic mess in which we find ourselves.

I track growth in domain names every week. I think it indicates how quickly new small businesses are being formed. After all, what business can you think of today (large or small) that does not have some sort of web site? I can’t think of any. One of the things on any small business start up checklist today is the web site. Hence, most all of them register a domain name.

So what’s been happening with growth in domain names? Lately, it’s not too pretty.

Chart

With all the talk lately about stimulating the economy, one of the best ways to do this would be to encourage the formation of new businesses.

Some would argue that we need to fix the credit market mess to help banks be able to lend to small business startups. This couldn’t be further from the truth. How many small businesses do you know that started with a commercial loan from a bank? I cynically say that banks do not want to loan to businesses until the business can survive without need of a bank, and that was true even before the credit crisis. This was certainly true in SoftLayer’s case – when the founders were preparing for launch in late 2005, there wasn’t a bank anywhere that would touch the SoftLayer business plan. What I’m saying is that the credit crisis isn’t that much of a barrier to small business startups. Passionate entrepreneurs will find a way to get going.

But all the passion to start one’s own business doesn’t go very far in the face of the real barriers to starting a business. One of the real barriers that an entrepreneur must overcome is tax issues. Do they begin as a sole proprietor? A partnership? An LLC? An “S” Corp? Should they incorporate? All of them have different tax implications. All of them have to deal with either income taxes at the personal level or corporate level. Some have to deal with self-employment taxes. Others must deal with 941 taxes. Then there are state and local tax issues, such as the margin tax if you’re in Texas. And don’t forget sales taxes and property taxes either.

One of the strategies that allowed the Internet to cement itself in our society during the 1990’s was this: just let it develop without taxing it. Without that burden, the Internet took off like wildfire.

Ergo, if we’d like a bunch of new small businesses to get going, let’s ease up on the tax burden on new startups. This would cost the government hardly any money at all. Think about it – businesses that don’t yet exist do not pay any taxes. Workers that are not yet employed do not pay any taxes. Currently unemployed workers do not pay income taxes, except for a pittance on unemployment benefits. So allowing new businesses to form and employ workers and transact business “tax-free” for a defined start-up period would produce an EXPLOSION of small business startups.

How long should this tax free period be? Per the SBA, if a new business survives 4 years, they have a great shot at surviving long term. So why not give all new business startups a tax holiday for four years as they establish themselves? Can you imagine how big the tax base would grow as these healthy, strong 4-year- old businesses begin paying taxes?

It seems that the biggest issue facing our new President and his administration is how to pay for all the things they’d like to do. Let me suggest that expanding the tax base is the best way to grow government revenues, as opposed to increasing the rates on the current tax base. Allowing a flood of new businesses to take root and grow our tax base may be the best way to fund our growing public budgets.

Naturally, SoftLayer would be more than happy to assist these new businesses with our enterprise class data center outsourcing services so that the new businesses focus on their business plan – not their IT overhead.

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