U.S. Small Business Administration
Office of the Chief Counsel for Advocacy
409 Third Street, S.W.
Washington, D.C. 20416
(202) 205-6533
http://www.sba.gov
May 1996
The document's purpose is to provide an overview of the law for small
entities. It is not intended, in itself, to create any substantive or
procedural rights enforceable by law or in any administrative proceeding.
Table of Contents
Foreword. . . . . . . . . . . . . . . . . . . . . . . . . .1
Overview. . . . . . . . . . . . . . . . . . . . . . . . . .3
Legislative History . . . . . . . . . . . . . . . . . . . .4
The Act . . . . . . . . . . . . . . . . . . . . . . . . . .7
Coverage . . . . . . . . . . . . . . . . . . . . . . .7
Increased Small Business Participation . . . . . . . .7
Semiannual Agency Agendas. . . . . . . . . . . . . . .8
Periodic Review. . . . . . . . . . . . . . . . . . . .9
Judicial Review. . . . . . . . . . . . . . . . . . . .9
Regulatory Analysis
Initial Regulatory Flexibility Analysis . . . . 10
Certification: When a Full Analysis
is Not Required. . . . . . . . . . . . . . 11
Final Regulatory Flexibility Analysis . . . . . 12
Appendix A. Small Business Statistics . . . . . . . . . . 14
Definitions of Small Business Entities . . . . . . . 14
SBA's Census-Based Small Business Data Base. . . . . 15
Minority- and Women-Owned Firms . . . . . . . . 16
Job Creation. . . . . . . . . . . . . . . . . . 16
Studies of Small Firm Financing. . . . . . . . . . . 16
Federal Reserve Survey of Small Business
Finances . . . . . . . . . . . . . . . . . 16
Federal Reserve Survey of Consumer Finances . . 17
Census Characteristics of Business Owners . . . 17
Internal Revenue Service Statistics of Income . 17
Data on the Self-Employed. . . . . . . . . . . . . . 18
Private Data Sources . . . . . . . . . . . . . . . . 18
Table: Employment and Payroll of Businesses. . . . . 19
Appendix B. The Regulatory Flexibility Act of 1980 . . . 20
Appendix C. The Small Business Regulatory
Enforcement Fairness Act of 1996 . . . . . . . . . 24
Foreword
On March 29, 1996, President Clinton signed the Small Business Regulatory
Enforcement Fairness Act. Among other things, the new law amends the
Regulatory Flexibility Act of 1980 to allow judicial review of an agency's
compliance with the law. This new provision gives small businesses a
powerful tool to ensure that agencies are considering the impact of their
actions on small entities.
The Regulatory Flexibility Act (RFA), first enacted in 1980, offers
small businesses, working with federal regulators, a unique opportunity to
root out some of the institutional biases that work against the small
entrepreneur. The law recognizes that the size of a business, unit of
government, or nonprofit organization frequently has a bearing on its
ability to comply with a federal regulation.
For example, the costs of complying with a particular
regulation "measured in staff time, direct compliance costs, recordkeeping,
outside expertise and other costs" may be manageable for a business with
500 or more employees, or revenue in the millions of dollars. On the
other hand, a smaller company may not have the ability to absorb the
expenses as easily, to set competitive prices, to devise innovations or
even to continue as a viable entity. Whereas larger firms may take
advantage of economies of scale, smaller entities have less output from
which to recover a relatively larger percentage of expenses.
The RFA was designed to place the burden on the government to review
all regulations to ensure that, while accomplishing their intended
purposes, they do not unduly inhibit the ability of small entities to
compete. Major goals of the act are:
1) to increase agency awareness and understanding of the impact of their
regulations on small business,
2) to require that agencies communicate and explain their findings to the
public, and
3) to encourage agencies to use flexibility and to provide regulatory
relief to small entities.
Until recently, no actions taken by an agency to comply with the RFA
were directly challengeable in court. Without enforcement þteethþ to
challenge an agency's certification that a regulation will not have a
significant impact on a substantial number of small entities, several
recalcitrant agencies do as little as necessary to comply with the act,
and others use loopholes to escape the RFA's requirements altogether.
The 1996 amendments provide for judicial review under the RFA and for
expanded authority of the chief counsel for advocacy to file amicus briefs
in court proceedings involving an agency's violation of the RFA. This
change in the law was supported by President Clinton and the Congress.
Easing the regulatory burden on small entities will require the
ongoing help of government regulatory agencies and the interest,
participation and ideas of small business men and women. The Clinton
Administration's reinventing government initiatives to reduce paperwork,
excessive penalties and unnecessary regulations will go a long way toward
leading small businesses out of the regulatory jungle. The White House
Conference on Small Business of 1995 was an extremely useful forum to
identify key regulatory concerns of the community, and the Office of
Advocacy continues to rely on the conference participants.
Most important, the latest amendments to the RFA will help ensure
that the potential of the RFA is reached to its fullest extent. If you
have comments, please contact the Office of Advocacy, U.S. Small Business
Administration, 409 Third Street. S.W., Washington, D.C. 20416.
Jere W. Glover
Chief Counsel for Advocacy
Overview
Prior to implementation of the Regulatory Flexibility Act (RFA) in 1980,
small businesses and other small entities shouldered the same burden of
federal regulations as their larger competitors, and with fewer resources.
For agencies that made good-faith efforts to comply with the RFA,
there was a fundamental change in the federal bureaucracy's method of
regulating small entities, defined in the act as small businesses, small
governmental jurisdictions and small not-for-profit organizations. It
amended the Administrative Procedure Act to ensure that regulators examine
not just any alternative but those designed to reduce burdens or enhance
benefits to small entities.
Under the RFA, each agency must analyze how its regulations affect
the ability of small entities to invent, to produce and to compete.
Agencies are supposed to balance the burdens imposed by regulations
against their benefits and propose alternatives to those regulations that
create economic disparities between different-sized entities.
The RFA, an outline for responsible, deliberate rulemaking,
establishes a procedure for looking at the effects of rules on small
entities. Regulated small entities are encouraged to participate in the
development and consideration of alternate means of achieving regulatory
objectives. Federal agencies must consider establishing different
compliance or reporting requirements, timetables, or exemptions to take
into account the resources available to small entities.
The 1996 amendments update the requirements for a final regulatory
flexibility analysesþincluding a description of the steps an agency must
take to minimize the significant economic impact on small entities. In
addition, whenever a small business feels adversely affected or aggrieved
by an agency rulemaking because of the agency's failure to comply with the
RFA, the small business may seek review of the agency's RFA compliance in
court. Finally, the requirements of the RFA now extend to Internal
Revenue Service interpretative rulemakings, previously exempt under the
provisions of the Administrative Procedure Act.
The chief counsel for advocacy of the U.S. Small Business
Administration has been designated to monitor agency compliance with the
RFA, and possesses authority to intervene as an amicus curiae in court
proceedings involving compliance with the RFA.
Legislative History
Prior to passage of the RFA in 1980, both houses of Congress built a
conclusive record of disillusionment and discontent among the regulated
small business community in a number of hearings over a period of 10
years. Small businesses and other small entities repeatedly claimed that
uniform application of undifferentiated rules to them and to larger
entities produced disproportionate adverse economic hardship.
The Senate and House Small Business and Judiciary Committees heard
reports from small businesses, small cities and towns, and small
non-profit institutions about the damaging impact of regulatory policy.
Evidence indicated that uniform application of federal regulatory
requirements imposed increases in the economies of scale and affected
small entities' ability to compete effectively. Reports on the bills of
both houses of Congress cited these disproportionate economic burdens on
small business as contributing to declines in productivity, competition,
innovation and the relative market shares of small business.
The Senate passed the RFA, adding Chapter VI to the Administrative
Procedure Act on August 6, 1980. The Judiciary Committee's report on the
original bill read as follows: þThe Committee believes that meaningful
regulatory reform must be government-wide, enforceable, and coordinated
with the legislative framework for the agencies....þ The report went on to
say, þThe APA is the fundamental legislation upon which federal rulemaking
is based, and, together with the case law that has grown up around it,
provides a foundation for nearly all significant agency actions. This is
where regulatory reform must be focused.þ
The House passed the measure on September 9, 1980. The bill was
signed into law on September 19, 1980, with most of the provisions taking
effect January 1, 1981.
The RFA is a relatively short statute. Yet despite its brevity,
numerous difficulties arose in the interpretation and implementation of
the act. Some of these problems are related to the specific language of
the statute; others are the result of agency indifference to the mandate
in the RFA. In either case, the history of implementation of the RFA has
been somewhat troubled and inconsistent. Since its passage, numerous
attempts have been made to amend or reinforce the RFA.
On September 30, 1993, President Clinton signed Executive Order
(E.O.) 12866, which, among other things, reinforced the RFA. To ensure
that the agencies' regulatory programs were consistent with the philosophy
of weighing the costs and benefits of available regulatory alternatives,
E.O. 12866 required agencies to abide by a number of principles. A partial
list follows:
1) Each agency shall identify and assess available alternatives to direct
regulation;
2) When an agency determines that a regulation is the best available
method of achieving the regulatory objective, it shall design its
regulations in the most cost- effective manner to achieve the regulatory
objective;
3) Each agency shall tailor its regulations to impose the least burden on
society, including individuals, businesses of differing sizes and other
entities (including small communities and governmental entities),
consistent with obtaining the regulatory objectives, taking into account,
among other things, and to the extent practicable, the costs of cumulative
regulations; and
4) The Office of Management and Budget may require a more extensive and
detailed analysis for a rule if it affects a sector of the economy,
including one predominantly made up of small businesses.
Bills introduced in the 101st and 102nd Congress attempted to address
RFA issues, but died in committee. Legislation was also introduced in the
103rd Congress proposing amendments to, among other things, amend the
judicial review provisions of the RFA. The judicial review provisions were
added by the Senate to the House-passed version of H.R. 820, the National
Competitiveness Act of 1993,. The bill did not pass.
In addition, in 1993 the Clinton administration's National
Performance Review (NPR) recommended that agency compliance with the RFA
be subject to judicial review. The NPR task force also recommended that
the Office of Advocacy be authorized to draft government- wide guidance on
compliance with the RFA.
In 1996, the Congress passed the Small Business Regulatory
Enforcement Fairness Act, expanding judicial review to the RFA and
promoting increased understanding of and voluntary compliance with federal
regulations by small entities. On June 6, 1995, the Senate bill, S. 942,
was referred to the Senate Committee on Small Business. Hearings followed
on February 28, 1996. In a remarkable flurry of legislative support, and
citing the efforts of the White House Conference on Small Business, the
Senate passed S. 942 with a unanimous vote (100-0) on March 15, 1996.
Early in the 104th Congress, the House of Representatives passed the
amendment to the RFA for judicial review in omnibus legislation, but the
Senate provisions were eventually adopted. On March 26, 1996, S. 942 was
incorporated into H.R. 3136, the Contract with America Advancement Act,
as the Hyde Amendment. On March 28, 1996, the bill was passed by the
Senate by unanimous consent; and on March 29, 1996, the Public Law 104-121
was signed by President Clinton.
The RFA amendments permit judicial review of agencies' compliance
with the RFA, update the requirements for a final regulatory flexibility
analysis, and expand small business review of rulemaking by the
Occupational Safety and Health Administration (OSHA) and the Environmental
Protection Agency (EPA).
Whenever a small business believes it is adversely affected or
aggrieved by an agency rulemaking because of the agency's failure to
comply with the RFA, the small business now may seek review of the rule in
court. The court may review the final regulatory flexibility analysis, the
agency's certification that the rule has no impact on small entities, and
the agency's compliance with periodic reviews of current rules. Under the
amendment, judicial review also applies to interpretative rulemakings
promulgated by the IRS.
The new law broadens the authority of the chief counsel for advocacy
of the U.S. Small Business Administration to file amicus curiae briefs on
cases under judicial review.
In addition to amending the RFA, the new law amends the Equal Access
to Justice Act, provides for a complaint process whereby small entities
may register complaints against aggressive enforcement officials,
incorporates President Clinton's directives on reasonable penalty
policies, and requires agencies to supply compliance guides for all new
rules with significant small business impacts.
The Act
The Regulatory Flexibility Act establishes that agencies shall endeavor to
fit regulatory and informational requirements to the scale of the
businesses, organizations and governmental jurisdictions subject to
regulation. Under the law, federal agencies are required to determine
whether a regulation has a significant economic impact on a substantial
number of small entities. Agencies also are required to consider flexible
regulatory alternatives for small entities and assure that such proposals
are given serious consideration.
Coverage
The RFA applies to every federal rule that requires public comment under
the Administrative Procedure Act, Section 553, or any other provision of
law. The 1996 amendment extends this coverage to interpretative
rulemakings by the Internal Revenue Service.
The small entities intended to benefit from the act include three types:
1) Small businesses. The term þsmall business concernsþ is defined in
Section 3 of the Small Business Act. The Small Business Administration's
general size standard definitions are located in Title 13 of the Code of
Federal Regulations, Section 121. Where SBA's size standards do not
appropriately reflect the effects of a specific regulatory proposal,
agencies may develop more relevant size determinants for rulemaking after
consultation with the Office of Advocacy. If a size standard is used in a
rulemaking, the standard must also be approved by the SBA Administrator
(15 U.S.C. 632(a)(2)).
2) Small organizations. Any nonprofit enterprise that is independently
owned and operated and is not dominant in its field is covered.
3) Small governmental jurisdictions. Governments of cities, counties,
towns, townships, villages, school districts, or special districts with
populations of less than 50,000 are covered.
Increased Small Business Participation
The RFA marks a recognition that federal agencies, in order to develop
awareness of their rulemaking activities by small entities, must make
greater outreach efforts. With the 1996 amendments, the act now requires
the Occupational Safety and Health Administration and the Environmental
Protection Agency to formally collect information from small business
representatives for regulation development.
In rulemaking, all agencies are required to take some or all of the
following steps in order to solicit input from small entities:
. Publish a semiannual regulatory agenda;
. Provide notice of rulemakings expected to affect small entities;
. Publish proposed rules in the Federal Register;
. Provide a description of the impact a proposed rule is expected to
have on small entities as determined in initial analysis;
. Publish notice of proposed rules in publications likely to be
obtained by small entities, such as industry publications or trade
association newsletters;
. Send direct notification of proposed rules to interested small
entities or their representatives;
. Conduct public forums on proposed rules to solicit comments using
public meetings or computer networks.
Small entities should participate in these processes. By interacting,
both small entities and agencies have an opportunity to fully examine the
implications and alternatives of regulatory actions. Small business
participation in the process both ensures that agencies have complete
information and enhances the ability of small entities to challenge an
agency action in court.
Under Section 609(b) of the amended act, OSHA and EPA are required to
convene small business advocacy review panels for each rulemaking that
will have a significant economic impact on a substantial number of small
entities. The act provides for a formal process of collecting information
from small entities; the representatives of small entities likely to be
affected will be identified by the chief counsel for advocacy before a
proposed rule is published. Input will be sought on the number and type of
entities affected, the projected cost of compliance and possible
alternatives to the draft regulation. Following this process, the
interagency review panel, including employees of the agency, the Office of
Management and Budget's Office of Information and Regulatory Affairs and
the SBA's Office of Advocacy, will prepare a report for the agency on the
potential impact on small entities.
Semiannual Agency Agendas
In April and October of each year, federal agencies are required to
publish a regulatory agenda listing all proposed or final rules expected
to be published in the Federal Register during the following year. Rules
to be included in the agenda are those likely to have a þsignificant
economic impact on a substantial number of small entities.þ Publication of
the agendas lengthens the amount of time the small entities have to react
to those proposals and rules.
Periodic Review
The RFA requires agencies to review all existing regulations to determine
if they have a significant economic impact on a substantial number of
small entities. Those rules that have an impact are reviewed to determine
if the regulation should be continued without change, revised or rescinded
to minimize any significant economic impact. Review of all agency rules
within 10 years of adoption or the 1980 enactment date, whichever is
later, is required. Agencies are required to have a plan for the periodic
review of rules.
Agencies are required annually to publish in the Federal Register
their intent to perform a periodic review of a given list of rules in the
succeeding 12 months. The agency must invite public comment. Agency
periodic reviews must evaluate:
. The continued need for the rule;
. The nature of complaints or comments from the public received during the
rule's enforcement;
. The complexity of the rule;
. The extent to which the rule overlaps, duplicates or conflicts with
other federal rules and to the extent possible, with state and local
government rules;
. The length of time since the rule was evaluated or the degree to which
technology, economic conditions, or other factors have changed in the area
affected by the rule.
Judicial Review
The 1996 amendments permit judicial review of agencies' compliance with
the RFA. Whenever a small business is adversely affected or aggrieved by
an agency rulemaking as a result of the agency's failure to comply with
the act, the small business may seek review of the rule or the agency's
RFA compliance in court.
The chief counsel for advocacy has been designated to monitor agency
compliance with the RFA and has the authority to intervene as an amicus
curiae in court proceedings involving compliance with the RFA. The court
may review any claims of noncompliance by the agency with respect to:
. Final regulatory flexibility analysis, including the agency's outreach
to collect input from small entities;
. Certification by the head of an agency that the rule will not, if
promulgated, have a significant impact on small entities;
. Periodic review of rules.
Regulatory Analysis
Initial Regulatory Flexibility Analysis
The RFA requires federal agencies to consider the impact of regulations on
small entities in developing the proposed and final regulations. If a
proposed rule is expected to have a significant economic impact on a
substantial number of small entities, an initial regulatory flexibility
analysis must be prepared. The initial regulatory flexibility analysis or
a summary of it must be published in the Federal Register with the
proposed rule.
An initial regulatory flexibility analysis is prepared in order to
ensure that the agency has considered all reasonable regulatory
alternatives that would minimize the rule's economic burdens or increase
its benefits for the affected small entities, while achieving the
objectives of the rule or statute. The analysis describes the objectives
of the proposed rule, addresses its direct and indirect effects and
explains why the agency chose the regulatory approach described in the
proposal over the alternatives.
Under Section 603(b) of the RFA, each initial regulatory flexibility
analysis is required to address: (1) reasons why the agency is considering
the action, (2) the objectives and legal basis for the proposed rule, (3)
the kind and number of small entities to which the proposed rule will
apply; (4) the projected reporting, recordkeeping and other compliance
requirements of the proposed rule, and (5) all federal rules that may
duplicate, overlap or conflict with the proposed rule.
While these five factors are necessary elements to an adequate IRFA,
they are not the sole factors necessary to perform an adequate analysis.
Most important, section 603(c) requires that each initial regulatory
flexibility analysis contain a description of any significant alternatives
to the proposal that accomplish the statutory objectives and minimize the
significant economic impact of the proposal on small entities. These
alternatives could include the establishment of differing compliance or
reporting requirements or timetables that take into account the resources
available to small entities; the clarification, consolidation or
simplification of compliance and reporting requirements under the rule for
small entities; the use of performance rather than design standards; or an
exemption from coverage of the rule or any part of the rule for small
entities.
Although agencies often overlook this possibility, regulatory
flexibility alternatives may include less stringent requirements for all
regulated entities or for different classes of regulated entities. The
section 603(c) analysis, a key part of the regulatory flexibility
analysis, informs the decisionmaker of the pros and cons of each
alternative, so he or she can make informed regulatory decisions.
The steps necessary under 603(b) include:
1) A description of the reasons why action by the agency is being
considered. This is currently included in the preamble to all proposed
regulations.
2) A succinct statement of the objectives and legal basis for the proposed
rule. This is currently included with proposed rules.
3) A description of and, where feasible, an estimate of the number of
small entities to which the proposed rule will apply. The agency describes
the industry or economic sector in total and its small and large entity
segments, includes a description of the industry or sector at the time of
proposal, and explains any existing dynamics, such as trends in employment
or birth of entities.
The definition of a small entity is an important element of this
analysis. Agencies may either use the statutory definition of small
entity or may propose an alternate definition in consultation with the SBA
Office of Advocacy. The statutory small business definitions vary by
4-digit SIC code and are found at 13 CFR Part 121, last repromulgated in
the January 31, 1996, Federal Register.
In the analysis, þsmallþ entities may be further divided into
multiple classes of small businesses, for example, 0-9, 10-49 and 50-500
employees. This segmentation allows the agency to differentiate different
types of effects on different-sized small entities, which might lead to a
different approach being applied to the very smallest entities.
The agency must include a description of the industries and economic
sectors as identified by, for example, their four-digit Standard
Industrial Classification Codes that directly or indirectly would be
affected by the proposed regulation.
4) A description of the projected reporting, recordkeeping and other
compliance requirements of the proposed rule. The description should
include an estimate of the classes of small entities that will be subject
to the requirement and the type of professional skills necessary for
preparation of the report or record. This cost analysis should describe
each item and estimate the costs, comparing large and small entities. It
should distinguish the initial costs from recurring or operating costs.
This information normally should be available in large part from the
paperwork burden analysis prepared under the requirements of the Paperwork
Reduction Act.
5) An identification, to the extent practicable, of all relevant federal
rules that may duplicate, overlap, or conflict with the proposed rule.
This should include information for regulated entities on other rules
governing the same activities.
Certification: When a Full Analysis is Not Required
If a proposed rule is not expected to have a significant economic impact
on a substantial number of small entities, either adversely or
beneficially, the agency is not required to perform an initial regulatory
flexibility analysis. In these instances, the RFA authorizes an agency
head to certify a rulemaking. To perform an adequate certification, an
agency must undertake a threshold analysis to determine the economic
impact of a proposed rule on small entities. Once this preliminary
analysis is undertaken, an agency then can determine whether to certify or
undertake a complete initial regulatory flexibility analysis.
The certification of a finding of no significant impact on a
substantial number of entities must be published with the proposed rule in
the Federal Register. The notice must be accompanied by an explanation of
the factual basis for the certification. Under the 1996 amendments, the
certification is subject to judicial review if the final rule is
challenged.
There is currently no case law that identifies the þtriggerþ levels
of þsignificant economic impact, or substantial number of small entities.
However, because the purpose of the analysis is to aid the decisionmaker
in resolving regulatory issues affecting small entities, it is the opinion
of the Office of Advocacy that any rulemaking that generates the interest
of a significant number of small entities warrants the application of the
RFA's analysis tools.
Final Regulatory Flexibility Analysis
When an agency issues any final rule, it must prepare a final regulatory
flexibility analysis or certify that the rule will not have a significant
economic impact on a substantial number of small entities. The final
regulatory flexibility analysis must discuss the comments received, the
alternatives considered and the rationale for the final rule. Either the
summary or the final regulatory flexibility analysis itself must be
published in the Federal Register with the final rule. Under the 1996
amendments, the final regulatory flexibility analysis is subject to
judicial review if the final rule is challenged.
The new law amends the requirements of the final regulatory
flexibility analysis contained in the original 1980 legislation. Each
final regulatory flexibility analysis must contain the following:
1) A succinct statement of the need for and objectives of the rule;
2) A summary of the significant issues raised by public comments in
response to the initial regulatory flexibility analysis, a summary of the
agency's assessment of such issues and a statement of any changes made in
the proposed rule as a result of such comments;
3) A description and an estimate of the number of small businesses to
which the rule will apply or an explanation of why no such estimate is
available;
4) A description of the projected reporting, recordkeeping and other
compliance requirements of the rule, including an estimate of the classes
of small entities that will be subject to the requirement and the types of
professional skills necessary for the preparation of the report or record;
and
5) A description of the steps the agency has taken to minimize the
significant economic impacts on small entities consistent with the stated
objectives of applicable statutes, including a statement of the factual,
policy and legal reasons for selecting the alternative adopted in the
final rule, and the reasons for rejecting each of the other significant
alternatives.
Again, the most important section is the analysis of the relative
merits and demerits of the alternatives and the rationale for the final
agency action. An agency may not simply rely on its preamble to the final
rule to comply with the requirements for a final regulatory flexibility
analysis. The RFA requires specific discussion of small entity
alternatives designed to reduce adverse impacts or enhance the beneficial
impacts of a rulemaking.
The RFA amendments modify the Administrative Procedure Act
requirements by turning the consideration of small entity issues into a
major component in rulemaking. Failure to fully comply with these
requirements could result in arbitrary and capricious rulemaking.
The Office of the Chief Counsel for Advocacy believes that although
agencies may not be legally required to perform an initial or final
regulatory flexibility analysis on every rulemaking, agencies should
aspire to perform these analyses for every rule that would have an
economic impact on small entities. The act generally provides that
agencies must prepare both an initial and final regulatory flexibility
analysis for rules that may have a þsignificant economic impact on a
substantial number of small entities.þ In practice, this requires agencies
to prepare an analysis whenever a rule's impact on small entities cannot
be described as de minimis. This practice will move away from speculative
analysis towards more fact-based decisionmaking within the spirit of the
law. We believe that an agency's resources should be shifted from the
effort to determine whether regulatory flexiblity analysis is required to
the more productive consideration of regulatory options for small entities
subject to the rule.
Appendix A. Small Business Statistics
One of the most difficult tasks in preparing either an initial or final
regulatory flexibility analysis is locating statistics on small business.
The information in this appendix has been furnished to assist with
development and review of initial and final regulatory analyses.
There were an estimated 22.1 million business tax returns filed in
1994. Of these, 68.3 percent were sole proprietorships, 20.6 percent were
corporations and 11.1 percent were partnerships. By most size standards
issued by the U.S. Small Business Administration, about 99.7 percent of
all firms are small and have fewer than 500 employees and less than $25
million in sales or assets.
About 23 percent of the tax returns filed are filed by about 5.1
million employers; the remainder represent the full- and part-time
self-employed.
Ideally, data used to analyze the cost and benefit of government
regulations should be data for individual firmsþtermed microdata. However,
virtually all publicly available data is confidential by lawþmeaning that
individual names and addresses cannot be disclosed. Therefore, most
government agencies that collect data release summary information on
groups of firms by industry, size or location.
The data sources available and listed below generally cover
statistics on industries' employment, payroll and receipts. Most available
data bases do not cover financial dataþthe balance sheet and income
statement information that is needed to analyze the cost of regulations.
This is the most sensitive type of information and is rarely available
even in aggregate form; profit information is usually unavailable.
While Census data will always lag behind the calendar three to four
years, new data on firm dynamicsþespecially births and deathsþis becoming
more readily available from the private sector, especially in cooperation
with Wells Fargo Bank, the National Federation of Independent Business and
the Gallop Organization.
A listing of data sources is provided in the SBA's Catalog of Small
Business Research, order no. PR-861 (Springfield, Va.: National Technical
Information Services, 1995). NTIS can be reached at (703) 605-6000 or
1-800-553-6847.
The sections following provide term definitions used in data
collection and summarize the data currently available.
Definitions of Small Business Entities
Establishments. An establishment is the smallest unit in which business
activity is conducted and on which statistical information is collected.
The establishment concept makes no reference to either ownership or
taxpaying status. Furthermore, establishments may be branches of larger
firms and differ from separately owned and operated businesses of similar
size in purchasing power, advertising coverage, management and control
systems, technical resources, and access to capital and credit. Most very
small businesses are single establishments.
Enterprises. The enterprise concept refers to all establishments owned by
a þparentþ company. For instance, an enterprise may own subsidiaries,
branches and unrelated establishments. In most instances, it is necessary
to use the enterprise concept to study the characteristics of small firms
since the ownership issue is critical for assessing the impact of a given
policy. About 15 percent of total employment is in small establishments
(fewer than 100 employees) owned by larger firms (more than 100
employees). There are 5.1 million enterprises in the SBA Small Business
Data Base and 6.3 million establishments.
Taxpaying Units. The concept of taxpaying unit refers to the legal
organization of a business as a sole proprietorship, partnership, or
corporation. Generally, tax data make no precise distinction between
establishments and enterprises. This makes comparisons across data sources
difficult, particularly for large multi-establishment firms, which can
file taxes as either enterprises, branches (subsidiaries) of a parent
enterprise, or consolidated corporations.
SBA's Census-Based Small Business Data Base
Beginning in late 1991, the Office of Advocacy of the SBA contracted with
the Economic Surveys Division (ESD) of the Bureau of the Census to produce
linked longitudinal data files on an enterprise basis. The data base is an
extension of Census' Enterprise Statistics program. The data base
includes information from 5.1 million enterprises and 6.3 million
establishments.
Some of the data have already been published in a number of sources,
including The State of Small Business: A Report of the President,
publication no. 045-000-00273-0 (Washington, D.C.: U.S. Government
Printing Office, 1994). Other tables from this new data base are published
in The Handbook of Small Business Data: 1994, publication no. 045-000-
00270-5 (Washington, D.C.: U.S. Government Printing Office, 1994). The
U.S. Government Printing Office may be reached at (202) 512-1800.
The SBA Office of Advocacy data files generally include the number of
establishments, firms, payroll per firm, payroll per employee, receipts
per firm and receipts per employee for five major size classes: firms with
fewer than 20 employees and those with 20-99, 100-499 and 500 or more
employees. The data are broken out by location and/or industry. For an
example, see the table on page 19.
Cross-sectional files of the raw data were produced for 1988, 1989,
1990, 1991 and 1992, and 1993 data are expected to be added. The files are
available in hard copy in looseleaf notebooks, on reproducible floppy
disks and in Lotus files on SBA's computers. Data are generally available
at the four-digit level of industrial detail for the United States and at
the two-digit level for individual states.
Customized tabulations or copies of the data base are available.
However, cost and/or delays can be expected because of recent budget
restrictions. Inquiries may be directed to Mr. Ken Sausman, Chief,
Research Programming Branch, Bureau of the Census at (301) 457- 25628 or
Dr. William Whiston, Chief, Research Contracts Branch, Office of Advocacy,
(202) 205-6530. No individual names or addresses may be provided from the
data base; these are confidential by law.
Minority- and Women-Owned Firms
Regular Census data for minority- and women-owned businesses are not yet
available. The Bureau of the Census will eventually link data for
minority- and women-owned businesses (those with employees only) to the
cross-sectional files for 1992.
The new Census Bureau annual survey of women-owned businesses will
eventually be incorporated into the SBA data tabulations for firms with
employees. It should be noted that about 85 percent of women- and
minority-owned firms have no employees and that only the about 15 percent
of firms with employees will be part of this data base.
Job Creation
Census files now available for the 1989-1991 and 1990-1992 periods are the
first U.S. government data files from which job creation can be studied
for all industries.
Studies of Small Firm Financing
Federal Reserve Survey of Small Business Finances
Within the last five years, two major surveys of small firm finances have
been conducted by the Federal Reserve Board and the U.S. Small Business
Administration. The National Surveys of Small Business Finances (NSSBF)
have been the most detailed examination to date of the credit needs of
small firms, as well as their sources and uses of funds. In each survey,
more than 5,000 small firms with fewer than 500 employees each provided
detailed answers on their uses of banks and bank services and alternative
sources of credit, their difficulties encountered in borrowing or raising
expansion capital, and their level of satisfaction with each type of
service. (Because of data limitations, firms without employees were not
included in the two surveys.)
Some of the highlights of the two NSSBF surveys included:
. Only 1 in 20 small firms with employees reported using funds from a
mortgage for business purposes: this finding was somewhat surprising. The
survey excluded very new home-based firms;
. Lines of credit were reported in use by about 55 percent of male-owned
firms and 50 percent of female-owned firms (1994 survey);
. Trade credit was used by 61 percent of small firms; 4 in 10 small
businesses used personal credit cards for business purposes.
Federal Reserve Survey of Consumer Finances
Several times during the past 15 years, the SBA has analyzed the household
asset information for those sections of the Consumer Finance Survey (CFS)
pertaining to business startup or ownership. In general, the survey data
indicate those percentages of a household's assets that may be considered
part of the business, either directly and indirectly.
The CFS was replicated by the Federal Reserve Board in 1995.
Preliminary tabulations should be available in the form of summary files
during 1996.
Census Characteristics of Business Owners
For the year 1987 and again for the 1992/1994 period, the Bureau of the
Census, under contract with the Minority Business Development Agency of
the U.S. Department of Commerce and the SBA's Office of Advocacy, produced
the Characteristics of Business Owners (CBO) data. The CBO is a survey of
125,000 small firmsþroughly divided equally into African-American,
Hispanic, Asian-American, women-owned and nonminority male- owned firms.
To be included in the CBO sampling frame, firms needed $5,000 in sales in
each respective year and had to have filed a tax return.
The CBO is the only nationally representative source of data for many
of the variables it covers. The CBO includes data on the demographic
characteristics of the owner, such as age, gender and years of prior
experience, and on the characteristics of the firm itself, such as sales,
export status, franchise status, hours and weeks worked by the business
owner, sources of debt and equity capital and whether the firm is
home-based. The 1992/1994 version of the CBO is expected to be
available in 1996.
Internal Revenue Service Statistics of Income
Each quarter, the Statistics of Income Division of the Internal Revenue
Service (IRS) publishes the SOI Bulletin. This publication contains data
for both households and businesses, and it is an invaluable source of
historical information. Data on business firms is generally provided by
receipt size class for proprietorships, partnerships and corporations.
Information on business profits from IRS is elusive. For sole
proprietors and partnerships, only data on net income are available.
Statistics on the preferred variablesþreturn on assets or return on
investmentþare not obtainable directly from the tax return; they may be
found only in balance-sheet information.
For small business corporations, data are more readily available. The
IRS' Source Book for Corporations contains data for corporations by asset
size class. Balance sheet and income statement information is available
for corporations in about 15 different asset classes. From these detailed
data, it is possible to calculate rates of return on assets as well as the
profits of small business (generally subchapter S) corporations.
Data on Self-Employed Persons
Each year, the March Current Population Survey (CPS) of the Bureau of the
Census asks a series of expanded questions about self-employed persons as
part of its firm size supplement. These questions include the hours and
weeks spent working in the business during the previous year, the income
earned, the demographics of the business owner, whether the firm (owner)
has or provides benefits and several related questions about the industry
of the firm.
Private Data Sources
The Kauffman-Ernst & Young Data Base of Fast Growth Companies (KEYFGC) is
a promising new data base that relies on data from two sources: the
accounting firm of Ernst and Young (for employment and sales information)
and the Dun and Bradstreet Corporation (for financial data). Four years of
information are currently available on each firm, including income
statement and balance sheet information.
The major promise of this data base is the ability to understand
where and how fast growing companies develop over timeþincluding their
detailed locations and industries. In addition, the KEYFGC data set is one
of the only data bases with actual financial data available on individual
(but unidentified) companies.
Table: Employment and Payroll of Businesses
Appendix B. The Regulatory Flexibility Act of 1980
Appendix C. The Small Business Regulatory Enforcement Fairness Act of 1996
* Last Modified: 6/18/01