Small Business To Be Hit…Again!
A short time ago, Federal Reserve Chairman, Ben Bernanke said the job market was gradually improving. Since then, unemployment has increased, causing Bernanke to admit he was “stumped” (my word–Bernanke’s words were: “We don’t have a precise read…”).
It is obvious that no one in Washington has a “precise read,” because the politicians are once again looking to the small business community to pony up more taxes to pay for a bloated federal budget.
The following video clip is of a short discussion between Treasury Secretary Tim Geitner, and Representative Renee Ellmers (R-N.C.), which should cause every small business owner in America to be concerned:
(email subscribers view video on my blog)
So, why shouldn’t we increase taxes on small businesses making over $250,000 per year? That’s a lot of money to most of us. Well, other than the fact that the U.S. already has the highest corporate tax rate in the world (even higher than socialist France) here are a couple of things to consider:
- The combined federal and state corporate income tax rate averages very closely to 40 percent of corporate profit. That means that a small business owner making $250,000 for the year pays about $100,000 of their profit to federal and state governments. Of the remaining $150,000, the small business owner must pay on the principal of any loans the company has. Basically, interest is deductible–principal is not. That is why, in many cases, small business owners take home less money than many of their employees–yet they pay more taxes. And if Geitner has his way, they will pay even more.
- The second thing to consider, is where is the money going to come from to grow a small business and make more jobs? Since the banks are not loaning to small businesses, the only place the money can come from today is out of profits, that is; the reinvestment of profits. That means that of the remains from the example above, a certain portion must be reinvested back into the business before any new jobs can be created. In many cases, this means that a small business owner showing $250,000 in corporate profits on their tax return may actually be living below the poverty level…before additional taxes.
Yes, it really makes sense to increase taxes on small business owners making $250,000 in corporate profits. In other words take away the money they may normally use to create new jobs. I just love the way politicians think.
You may note that Geitner said that they had no alternative to raising taxes, because otherwise “…you have to shrink the overall size of government programs.” Duh! Regarding Geitner’s statement, here are a couple of interesting statistics:
- Federal spending has climbed from $2.89 Trillion in 2008, to $3.82 Trillion this year–almost a Trillion dollar increase.
- For those concerned about federal funds for education, please note that although the amounts have steadily increased since the Clinton years, federal funding still only accounts for 8.2 percent of overall spending on education. The other 91.8 percent is provided by state and local government.
So, once again, the politicians are trying to kill the goose that lays the golden job opportunities. With little access to capital, crippling government regulations, the looming cost of the new healthcare law, and now a new small business taxation plan taking shape, is it any wonder that small businesses are not charging full-speed ahead with expansion plans and the creation of new jobs.
On the other hand, there is very little in the mainstream media about small business activism. Is this a case where the small business community is going to just sit back and hope that things will eventually improve by themselves?
What about you?
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Funding For Startups
When talking about funding for startups, I continually find it interesting (and disheartening) that the business community so closely (exclusively?) associates “startups” with Venture Capital. In fact, a young entrepreneur recently told me that a business should not be called a “startup” until they begin searching for venture capital.
The Reality
That was a very naïve comment, and here’s why: According to the Kauffman Foundation, there
were over 6.5 new businesses started in the U.S. during 2010. Also, according to PriceWaterhouseCoopers reports, there were 3,277 venture capital deals made during 2010. Not very good odds.
So, where did the funding for startups come from to start the remainder of the 6.5 million new businesses?
Angel Investors
Certainly some financing came from Angel Investors, but their requirements are not that much different from the VCs. Angels usually precede VCs and get a company started before the VC becomes involved.
The data is elusive, but It appears that (certified) Angel investors may not have made substantially more deals than the VCs did. Even if they made 10 times as many deals as the VCs, that would only account for about one-half of one percent of the total startups for 2010.
Angel investors are actively coming together as “groups” that act on new venture deals as investing partners, just like the Venture Capitalists. The lone wolf angel investor is a dying breed.
Banks
Of course, no bank is going to provide funding for startups (other than, perhaps, a personal loan to the entrepreneur…if they have substantial collateral). There is also no indication that banks will begin more aggressive lending to businesses, especially small businesses, anytime in the foreseeable future.
Banks certainly are not the answer now, or any time soon.
SBA Loans
We need to remember that SBA loans are made by banks, not the government. SBA loans are only partially guaranteed by the government, and I have been told by many bankers that their SBA loans must meet the same borrower requirements as a non-SBA loan. Therefore, in reality, the SBA is not the answer either.
Grants
There is no such thing as a U.S. government grant available for the purpose of starting a for-profit company. There can be local “incentives” like tax postponement, subsidized property or facilities, etc., but finding grant money to start a for-profit business in the U.S. is like finding the Holy Grail.
While many of the economically emerging countries are offering strong incentives to entice American entrepreneurs to start businesses in their country, the U.S. seems paralyzed about doing anything to keep those businesses here, let alone expand our own business community.
Who’s Left?
Well, that still leaves something over 6 million new startup businesses without any realistic form of outside funding. That means the primary sources of funding for startups available in the U.S. are: (1) the entrepreneur’s personal borrowing capacity, (2) family, and (3) friends.
Unfortunately, for nearly all of the over 6.5 million new U.S. businesses that will start up during 2011, the only investor decision that can be made is which family member or friend to approach first. Very sad.
How did you fund your startup business?
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Entrepreneur Definition
Many people are looking for a valid entrepreneur definition, but the very term “entrepreneur” is being challenged by the “bully” of the entrepreneurial world–Entrepreneur Media, Inc. (EMI), publishers of Entrepreneur magazine. EMI is one of the largest resources of information for entrepreneurs around the world…as long as you don’t use the word ENTREPRENEUR in your business. It seems that EMI owns the U.S. trademark on the word “entrepreneur.” Yup, even though the word is 100′s of years old, commonly used, and derived from the French–EMI holds the trademark. Worse yet, they vigorously defend their trademark as evidenced by just a few of their threats and prosecutions, as follows:
EMI goes after a broad spectrum of businesses with the help of Latham & Watkins, a 2,000 attorney corporate law firm with 31 offices around the world. No one is spared, from the one-person website business, to Universities and non-profit organizations, as well as large businesses. There is no tally available, but EMI has sued, or threatened to sue scores of businesses and organizations since the early 1980′s.
Interestingly, the founder of Entrepreneur magazine, John Leonard Burke (aka Chase Revel), was a convicted felon (attempted bank robbery) who also, sometime later, had notes delivered to bank tellers saying their children had been kidnapped and to leave canvas bags of money for him, and the children would be returned. Actually, he did not kidnap the children, nor did he receive any money. However, attempted extortion still carries a penalty.
After his release from prison he started Entrepreneur and then registered the trademark “entrepreneur” in 1979. He eventually sold his enterprise to the current owners in the late 1980′s…and continued to have brushes with the law.
The irony I see in this whole issue of entrepreneur definition is the fact that the people who are at the forefront of promoting entrepreneurship (EMI & Entrepreneur) are the very people who are running roughshod over the entrepreneurs who use the word “entrepreneur” in the definition or promotion of their business. So be very careful how you use the word “entrepreneur” in your business
It also makes me question whether I will ever recommend any product or activity sponsored by EMI or Entrepreneur magazine in the future. I think I will distance myself from this enterprise from here on.
What do you think?
Note: This post is an excerpt taken from an article in Businessweek, (May 23-May29, 2011) authored by Paul M. Barrett.
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