The State Of American Small Business

People love to boast about small businesses being the backbone of America. Still, with so much focus on tech giants and popular online retailers, the focus on small businesses often falls through the cracks. However, the claim that America runs on small businesses isn't far-fetched. According to the Small Business Administration (SBA), small businesses employ 58.9 million people or nearly half of the private workforce.

However, small businesses tend to thrive in certain areas. Just like Silicon Valley is considered the birthplace of the tech industry, which states are the best for small businesses? We gathered data from the SBA's 2019 Small Business Report to examine the ebb and flow of small businesses in recent years. Keep reading to see which states are struggling and which are thriving.

Not-So-Small Workforce

Nationwide unemployment has reached record lows. While that points to a booming economy, it has left a significant number of small businesses with too many job openings and too few candidates. Despite the struggle to find qualified candidates, some states have significantly more small business employees than others. Montana had the highest percentage, with 64.8% of the private workforce employed by small businesses. Wyoming and Vermont weren't too far behind, with small business employees making up 63.1% and 61.3% of the private workforce, respectively.

Florida ranked the lowest for small business employment. With just 41.6% of the private workforce employed by small businesses, Florida ranked below Nevada, Tennessee, and Georgia. With the population density and diversity of urban centers, people often look to cities for striving businesses and innovation. However, even some of the most populated states didn't make the top 10: California and New York lingered around the 50% line, and Texas ranked in the bottom 10, with small businesses employing just 45.1% of the private workforce.

Open (or Closed) for Business

Looking at states' employed percentage can say more about the population than business success, though. California gained over 8,700 more small businesses than it lost, earning it the top spot. Texas, Washington, and North Carolina also saw significant increases, with net gains of over 1,000 small businesses each. On the other hand, Missouri, New Jersey, and Michigan registered net losses. While Missouri took the hardest hit, losing 905 more small businesses than it gained, New Jersey lost 878, and Michigan lost 700.

Despite high taxes, a higher cost of living, and a competitive labor market, California's high revenue and large population make it a prime environment for small businesses to thrive. But the same factors that boost one state's small business success may be the downfall for others. Small business owners in Missouri blame too strict of regulations for their small business struggles. Small businesses in Michigan may also be facing problems because of the decline of Detroit. Not only has Detroit yet to recover from its tumultuous past, but also the lack of income has made it difficult for business owners to find affordable properties.

Small Business Sectors

The U.S. economy has been on an upward climb for years, primarily propelled by the health care, technology, construction, manufacturing, and retail industries. But with small businesses holding the economy together, which industries employ the most small business employees in each state? The majority of the South, Midwest, and Northeast were dominated by the health care and social assistance industry, while the accommodation and food services industry employed the most small business employees in Florida, Georgia, South Carolina, and numerous states in the West. However, the only state where professional, scientific, and technical services employed the most small business employees was Virginia.

While California, Texas, and Washington were the top three states where small businesses are thriving the most, they don't seem to fulfill one specific niche. Looking at all industries, Nevada dominated the administrative, support, and waste management industry and the arts, entertainment, and recreation industry, while Vermont had the highest percentage of small business employees in the educational services, information, and retail trade industries. Interestingly, New York had the highest percentage of small business employees in real estate and rental and leasing. Despite claims of small businesses struggling in New York City, it may just be that specific sectors – like retail – are shrinking while others thrive.

Small Business, Big Success

Utah, Virginia, and Minnesota have the highest median annual income in the United States. Still, when it comes to small businesses, Rhode Island, Massachusetts, and Connecticut are where the revenue is. While the median income for self-employed people running incorporated businesses was just $55,477 in Utah, Rhode Island had a median income of $65,580. Massachusetts and Connecticut also had median salaries of $65,084 and $63,883, respectively.

In some states, being a self-employed small business owner can be more profitable than working for someone else. In Alabama, Louisiana, Arkansas, Tennessee, Kentucky, and West Virginia, the median income of self-employed people was at least $999 more than the median income of all workers in each state. Alabama had the largest discrepancy, with the median income of self-employed people totaling nearly $6,000 more than the median of all workers. This significant difference could stem from the growing income inequality the state has faced in the past few years, dragging down the median salary of workers while boosting the wages of business owners.

Owned by Women

Despite Americans' mere 9% overall business growth between 2014 and 2019, female-owned companies grew by 21% during the same period. According to the U.S. Census Bureau's 2016 Annual Survey of Entrepreneurs (the most recent report available), Alaska had the highest percentage of female-owned companies (23.1%). And these companies may also be seeing higher revenue.

Not only are the majority of Alaska's women-owned companies less than five years old, but also 71% had fewer than five employees in 2018, which can lead to increased revenue through decreased overhead in the form of worker salaries. Missouri, Colorado, and Maryland followed Alaska, with female-owned companies making up more than 22% of businesses in each state.

On the other hand, Idaho, Utah, and Vermont had the lowest percentages of female-owned businesses. While women-owned businesses made up just under 15% of firms in Vermont, female-owned companies made up just 14.7% and 13.4% of businesses in Utah and Idaho, respectively. However, with 1,821 new female-owned businesses launched every day in 2018, even the states with the lowest percentages are likely to see growth in the coming years.

Start, Grow, and Run

The American dream is rooted in success, and small business owners are living it every day. All across the country, small companies are popping up, outpacing the growth of overall businesses. While states like California and Texas are thriving more than others, states like Alaska and Missouri are leading in diversity and closing the gender gap among business owners. But some states have some catching up to do. Owning a small business in New Hampshire may not be worth the potentially lower income, while Idaho could use an increase in female-owned companies.

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Methodology

We used the U.S. Small Business Administration's 2019 Small Business Report to examine the state of small business in America. The report includes data from various sources other than the SBA and includes the Statistics of U.S. Businesses report by the U.S. Census Bureau, the American Community Survey by the U.S. Census Bureau, and the Business Employment Dynamics report from the Bureau of Labor Statistics, as well as others.

To find the net number of small businesses opening or closing in each state, we subtracted the number of establishments that closed from the number of establishments that opened. As noted in the report, the reported numbers were for the third quarter of 2017.

When looking at which industry employed the most small business employees in each state, we used tables from the SBA's report about industry employment for 2016.

Data on female-owned small businesses came from the U.S. Census Bureau's 2016 Annual Survey of Entrepreneurs. As noted in the survey's methodology, it includes "all nonfarm businesses filing Internal Revenue Service tax forms as individual proprietorships, partnerships, or any type of corporation, and with receipts of $1,000 or more."

Limitations

The data presented here come from the U.S. Small Business Administration's 2019 Small Business Report. The data included in the report come from a variety of sources and cover different time periods. Although not ideal, the report represented the most recent of its kind.

Fair Use Statement

Small businesses are an important part of any economy. If someone you know could benefit from the data presented here, you can share this study for any noncommercial reuse. However, we ask that you link back to the original analysis so that readers can review it in its entirety and view the methodology. This also gives our authors credit for their work.