Monday, October 10, 2011

If Small Businesses Are Economic Engines Of The US ... What Changes Are Needed To Re-ignite The Passion Of Innovation And Entrepreneurship?

Small business needs to be freed of excessive and punitive taxation and regulation. If you have an environment hostile to business, then there is no incentive to seek success.

If small businesses are successful, the economy benefits, America enjoys higher rates of employment, better conditions for workers and a better market for the consumer. But government has got to free it's grip first.

Most small businesses are taxed as individuals. In every case if you want to drive hypergrowth of our economy you ought to be considering a change from income taxation which punishes productive behavior to end use only consumption taxation, which taxes people only on the amount they choose to consume from our economy. The whooshing sound you would hear would be investment dollars and seed money pouring into the US to fund productive businesses that can now compete on price due to the removal of all or part of the embedded taxation inherent in the price of goods and services in an economy where income and/or value added activity is taxed.

The passion for entrepreneurship and innovation burn brightly, as always. Government just needs to get out of the way.

Small businesses pay ten times more proportionally than do large corporations to comply with regulations and tax codes, according to my friend Charles Wilson, a risk management consultant. If compliance costs a big company 1% of revenues, it costs us 10%. And that’s just doing the paperwork, not paying the taxes, fees, and premiums.

The time and money it takes a small business to deal with taxes (fed, state, payroll, local), insurance (health, liability, workers comp), employment compliance, etc. adds up to a sizable proportion of our annual hours. Every hour we’re answering a query from the IRS or the payroll tax people is an hour we’re not being productive, generating profits, creating jobs, providing products and services wanted by our clients.

All these government agencies pay lip service to the importance of small business as the engine of job creation and innovation in our economy, but their policies toward small business say just the opposite.

The cost: tax revenue lost on the profits we don’t earn, and payroll taxes on the jobs we don’t create. Multiply this by millions of small businesses, and I bet it’s a double-digit hit to the nation’s productivity.

While discussing the challenges of small business ownership with a friend and advisor, he equated the challenge of limited access to capital with starting a fire. He said, "To start a fire, you need two things: A spark and some wood. Unfortunately, in today's world, the higher value perception is placed on providing the wood."

The passion of U.S. innovation and entrepreneurship is not dead. It never even dimmed, despite the current economy. The challenges facing entrepreneurs are more centered in limited education, access to relationships and the costs of customer acquisition than in a downward facing economy.

While passion and innovation may fuel a business, they are rarely sufficient to grow and sustain a business. Experience, capability, quality products and services and the ability to compete - and to win - are essential to business success.

Sure, favorable tax policies would certainly help but they would also dramatically increase the number of competitor companies. What's needed are policies that do not punish the small business owner for being small and provide for a "period of sustainment" during which the small business owner is freed from excessive capital gains or other taxes that result from successful execution of business fundamentals.

I also think that we, as entrepreneurs, need to learn some lessons from our big business counterparts:

1. We need to band together and partner more often.

2. We need to seek out alternative means of financing, including bartering of products and services. Starting off with or acquiring huge debt means having to make a lot more money before you can turn a profit.

3. We need to work more closely with local Chambers of Commerce, elected officials and the media to bring more attention to small business issues.

4. We need to arrive at the discussion with real and achievable solutions that are applicable to a broad range of business types. After all, we don't want to necessarily remain small forever.

5. Finally, we have to learn when it is appropriate to set passion aside and apply old-fashioned common sense to the situation. One of the hardest things for a passionate business owner to do is to accept when we're in over our head, close up shop and try again.