SMB Market Overview Part 2: Getting Started

In part 1 of our SMB market overview, we looked at the size and scope of the huge and diverse SMB segment.

Let’s continue with a dive into the basics of business formation and funding sources, and a snapshot of the overall SMB contribution to the U.S. economy.

What are the most typical SMB business types?

The most common types of SMB business structures are sole proprietorships, partnerships, limited liability corporations (LLCs), C corporations, and S corporations. Each differs in amount of taxes the owner pays, and the personal liability for the owner. A sole proprietorship is perhaps the easiest to form, but does not create a separate business identity. A partnership may be the best choice for groups who aren’t yet ready to incorporate a formal business. C and S corporations are legal entities separate from their owners, and have differing tax implications. An LLC is a type of hybrid between a partnership and a corporation.

What is the rate of SMB formation?

Despite the economic downturn in 2020, start-up activity grew 24% last year: 4.4 million new businesses were formed, compared to 3.5 million in 2019. 2021 is shaping up to be a period of growth for new businesses as well — the U.S. Census Bureau reports that 440,165 business applications were issued in March, up 3.4% from February.

Ecommerce is an especially hot area for startup activity; the sector grew an estimated 28% last year to well over $4 trillion, outperforming pre-pandemic expectations.

How many SMBs survive the startup phase?

The Small Business Association reports that on average 68% of new businesses survive at least two years, 49% survive five years, and 33% survive 10 years.

Why do startups fail?

New businesses can fail for a variety of reasons. ‘No market need’ and ‘poor cash flow’ were the top reasons in a 2019 CB Insights analysis of 368 failed startups. In that analysis, only seven percent of the businesses surveyed said a failure to pivot was their downfall; that changed dramatically in 2020 as the pandemic forced countless SMBs to adapt to changing customer preferences.

How are startups funded?

Personal and family savings are the most common source of startup capital, followed by business loans, personal credit cards, and other personal assets.

What do SMBs contribute to the U.S. economy?

Simply put, a lot. According to the SBA’s Office of Advocacy, small businesses created 10.5 million new jobs between 2000 to 2019, accounting for almost two thirds (62.5%) of net new jobs.

Small businesses comprise 98% of U.S. exporters, and in 2019 accounted for 44% of U.S. gross domestic product. In fiscal 2019, 26% of federal contracting dollars went to small businesses.

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