New businesses are the life blood of entrepreneurship. There has never quite been a crisis like Covid-19 before, where the government by its own action brought an otherwise healthy economy to a standstill for public health reasons. What effect does abruptly closing down and then gradually reopening an economy have on business formation and entrepreneurship?
- Covid-19 has given rise to opportunities for new businesses. If an entrepreneur can solve a problem raised by Coronavirus, there is a unique opportunity for the new business to establish a market. The impact could be direct, as in a vaccine or medical advance related to the virus; technological, as in facilitating telemedicine; or indirect, as in facilitating delivery of groceries or pharmaceuticals to consumers who are maintaining isolation.
- Disruptions in the labor market caused by layoffs in periods of economic stress may cause former employees, whose positions may have been permanently eliminated or who are unable to find a new job, to decide to start a new business. There may, however, be a time lag between the employee layoff and the new business formation as the former employee looks for work or takes time off, so this type of new business activity may not be readily apparent at the outset of Covid-19.
- The US Census Bureau tracks new business formation through the filing of applications for Employer Identification Numbers (EINs) on IRS Form SS-4. The Census Bureau divides these applications into three broad categories: “High Propensity,” i.e. businesses that are likely to generate payroll, “With Planned Wages,” i.e. businesses with planned wages on a date indicated on form SS-4, and “Business Applications,” which represents all business applications for an EIN, other than certain specialty categories. Tracking the US Census Bureau data on an ongoing basis through Covid-19 can offer helpful insights into the impact of the virus on new business formations. The US Census Bureau recently released Business Formation Statistics, Second Quarter 2020.
- Overall, business applications for the first two quarters of 2020 are broadly in line with 2019
- High Propensity applications comprise a slightly smaller percentage of overall applications in in the first two quarters of 2020 compared to 2019
- There is significant regional variation, with the Northeast showing considerably higher declines in all classes of applications than other regions
- It is probably too early to draw any definitive conclusions from the data. It does appear that new business applications have continued at approximately 2019 levels, indicating that entrepreneurship remains relatively strong despite the economy. One might have expected the data to indicate a significant decline in new business applications. It is possible that the data includes startups that are a result of disruptions in the labor market, although future data will be required to verify this assertion.
Inspire Business Law Group, PC assists entrepreneurs with new business formation, guiding owners through issues including choice of entity (e.g. C Corporation, S Corporation, or Limited Liability Company (LLC), choice of jurisdiction (e.g. Delaware or California), documentation, employment issues, intellectual property issues, and initial agreements with customers and partners.
If you require any further information about starting a business, please contact Edward Grenville, Managing Shareholder, Inspire Business Law Group, PC (egrenville@inspirelawgroup.com; +415 279 0779; www.inspirelawgroup.com).
This article is provided for educational and informational purposes only and is not intended to be, and should not be construed as, legal advice.