The extent to which the economic climate influences business formation rates is quickly becoming a hotly debated issue in the startup world. A widely circulated report from the Kauffman Foundation recently revealed that the number of annual business startups is fairly constant and independent of economic recession or boom. Yet, a study from the Small Business Administration found that business startup rates are heavily affected by a state’s unemployment rate, with more startups in periods and regions of recession.
In order to reconcile these two studies, it’s important to consider that they measure slightly different business types. The SBA looks at both employer and non-employer firms while the Kauffman Foundation only investigates employer firms.
Non-employer firms are smaller (with the only employee being the owner) make up more than three-quarters of all the firms and close to 80 percent of all startups. The rate and creation of employer and non-employer firms are very different, according to Small Business Trends.
It makes sense that external economic conditions might affect the formation of the two business types very differently. Looking at the two studies together might suggest people startup employer firms to pursue business opportunities independent of the climate, while non-employer firms are formed in response to bad economic alternatives.
Entrepreneurs might benefit from considering the motivations of their peers if they want to take the jump into incorporating their employer and non-employer businesses.