The U.S. Census Business Formation Statistics have gotten a lot of attention since the start of the COVID pandemic.
The Census Bureau chart below (click to enlarge) shows why.
Since early in the pandemic, applications for business tax I.D.s (which is what the business formation statistics track) have dramatically increased.
This is has resulted in many sources saying that the number of small business starts has dramatically increased - and increased by the same number as applications for tax I.D.s.
While it's correct to say the number of small business starts has increased, it's incorrect to say they've increased as much as tax I.D. applications have.
The reason is that only a small share of tax I.D. applications result in a new small business starting.
That's because applying for a tax I.D. is quick and easy. But actually starting a business is hard. So many who apply for a tax I.D. don't end up starting a new business.
For example, the Census reported 418,000 business applications filed in December of 2021.
Of the 418,000 applications, 137,000 were from what the Census calls "high propensity applications." These are the applications the Census thinks will result in the formation of an employer small business.
But the Census only expects a subset of applications will lead to the formation of an employer business. Key quote from the Census business formation release:
"... the Census Bureau is projecting that 30,201 new business startups with payroll tax liabilities will form within 4 quarters of application from all the business applications filed during December 2021."
In other words, the Census thinks about 22% of high propensity applications will result in a new small business starting within the following year.
The Census doesn't estimate how many solopreneur businesses ("other than high propensity" in Census speak) will likely be formed.
But we do, based on asking about tax I.D. applications for over a decade as part of the MBO Partners State of Independence study.
We've found that about 18% - 20% of solopreneurs who file for a tax I.D. follow through and start a business that generates revenue and lasts at least one year.
This means probably around 56,000 new solopreneur businesses will be formed based on December's data.
So in total, we would expect that the 418,000 tax I.D. applications filed in December of 2021 will result in about 86,000 new businesses over the following 12 months.
The good news is that 86,000 new small businesses are still, by historical standards, a lot of new small businesses from just one month's filings. It's just not 418,000.
