The wave of US corporate formations in the second half of 2020 was one of the pandemic's many surprises.
After cratering at 30% in the weeks following the March freeze, paperwork filed by potential companies began to grow in June and ended the year for 2019 at nearly a quarter, according to an analysis of federal tax documents from the U.S. Census Bureau .
According to John Haltiwanger, an economist at the University of Maryland, it was the highest annual total ever.
The rise of entrepreneurship is taking place against the backdrop of massive closures of established small businesses as the coronavirus shuts down stores and keeps people at home. The National Restaurant Association estimates that 17% of American restaurants – or about 110,000 establishments – are closed permanently or for the long term.
At the same time, the pandemic has accelerated the shift to online shopping. About a third of the increase in new business applications comes from those planning online and other "non-store" retailers, showing how people can build a website and start selling in days. The phenomenon provides a lifeline for people as the national unemployment rate of 6.7% has nearly doubled since February.
In the suburbs of North Atlanta, Doug McCue turned his passion for roasting coffee beans into e-tailer CueBrew Coffee Roasters in May, when he couldn't get a full-time job after moving from New York in 2019. For now, he only earns 10% of what he earned by working in luxury retail, although his business is growing.
"In the beginning it took a little courage to say," Okay, this is what I'm going to do "versus" Let me fall back on what I've done before, "McCue said.
The phenomenon lessens some of the pandemic's blow to the job market and gives the newly unemployed a chance to recoup some of their lost income, Haltiwanger said. “We still are 10 million lower jobs through all of this, but I think this startup activity is starting to disappear, ”said Haltiwanger.
Surprisingly to some economists, business owners applied for 4.3 million employer identification numbers from the Internal Revenue Service in 2020, a 24% increase from the same period in 2019 despite the spring closures. While that includes many sole proprietorships, economists are encouraged by a subset of those IRS filings classified as “ high-propensity '' filings, which have characteristics that suggest future businesses will have employees. They were up 16% in 2020.
Overall, up to the beginning of October, the country saw about 600,000 more business filings than the same period in 2019, and nearly 200,000 of those were in online retail, according to a breakdown by the U.S. Census Bureau.
"US commerce has evolved in real time in response to the virus," said Kenan Fikri, research director of the Economic Innovation Group.
Last year's surge in entrepreneurship was a big departure from the Great Recession more than a decade ago. In 2020, applications for federal employee ID numbers grew for 29 consecutive weeks through the end of the year. According to a new analysis by the Economic Innovation Group, applications had a profit of up to three weeks in 2008.
Web hosting companies such as Shopify Inc. and Squarespace Inc. offer simple templates for ecommerce businesses, while on-demand companies like Printful Inc. can provide printing, storage and shipping.
“The proliferation of applications to start new businesses has spread across industries,” said Fikri, “but we're seeing real spikes right where you'd expect: in the industries that are experiencing real incremental changes in demand, from e-websites to home delivery to truck transport. "
Certainly, many of the people who file the IRS documents will never get off the ground, and those who do will likely take several months to get started, economists warn.
Still, there's reason to believe the boom is legitimate, said Barry McCarthy, chief executive officer of small business services firm Deluxe Corp. A Deluxe unit helping start-ups pick up was 10% higher last year than in 2019, and the unit that helps small business check printing see a "dramatic" increase in orders, McCarthy said.
In Dallas, Trey Griffin has resold everything from Harley-Davidson memorabilia to hard-to-find Lego sets since he lost his job in the software industry in March. Today, he spends his time scouring estate sales and thrift stores looking for items that will help him at least triple his money. He founded a limited liability company for his company in the summer.
"It's not impossible to do this full-time, but it's a lot of work," said Griffin, who hasn't given up on the search for a traditional 9-to-5 job.
Photo above: Doug McCue prepares an order of coffee in Roswell, Georgia. Photographer: Matt Odom / Bloomberg
Copyright 2021 Bloomberg.
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