The Surge in New Small Business Applications

Applications to get a tax ID as part of starting a business jumped a dramatic 77% in Q3 from the prior quarter. 

This was the largest increase ever in business applications - and there's nothing even close.

As the U.S. Census chart below shows (click to enlarge), both solopreneur business applications (referred to as "Applications Other than High-Propensity") and High-Propensity Business Applications (those indicating they are planning on hiring employees) significantly increased in number. 

An interesting aspect of this data is the difference between the current surge compared to the slight uptick in applications during the last recession (2008-2009).  

There are several likely reasons for this surge.  

First, it's much easier and cheaper to start a small/solopreneur business than it used to be.  This is especially true for gig economy businesses. 

Another reason is that the CARES Act stimulus started running out in late Q2, which meant the 30 million Americans relying on the added benefits needed to find alternative income sources.

A third reason, which comes from our interviews, is that many people see starting a small/solopreneur business as a better post-COIVD option than returning to a traditional job.  

The business applications data comes from IRS Employment Identification Numbers (EIN) applications.  EIN's are the tax id number that identifies a business.  Not all small/solopreneur businesses have EINs. Some, and especially independent workers working part-time, use their social security numbers instead.  But almost all employer businesses have EINs.  

An important point to note is that not all EIN applications result in a small business being started.  Census data shows around 15% of EIN applications lead to a small/solopreneur business being started over the following  2 years.

Our research on small business formation shows about 9% of those who say in surveys they plan to start a small/solopreneur business over the next 2-3 years in our surveys end up doing so. 

We've also found that people who have applied for an EIN and opened a business bank account are much more likely to follow through and start a business, with about 18% of those doing so.  So our data is pretty consistent with the Census.

It's too early to know if this surge is a one-time event, or whether it signals a substantial uptick in small/solopreneur business formation going forward.  

We are forecasting an increase in the number of small and solopreneur businesses post-COVID, but nowhere near Q3's 77% increase.

We'll have more on our forecast in the near future.

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