Here's Why It's So Hard to Start a Business in the U.S.
A new report from the World Bank ranks the United States 51st in the world when it comes to the ease of launching a new company. So what's making life so difficult for the nation's entrepreneurs?
By Leigh Buchanan
October 26, 2016
Hey, at least we beat the crap out of Malta.
In the WorldBank's annual report on the ease of doing business, the United States rankseighth out of 190 countries. But it was all the way down at No. 51 on the easeof startinga business, a ranking that weighs factors like procedures, time, and costs.That's a drop of six places from last year, the country's biggest decline inany category.
Comparable economies including Canada, Hong Kong, and the UnitedKingdom fared much better. Among benchmark nations, only Germany did worse.
Startup rates have, in fact, been rising in the U.S. for twoyears, with roughly 550,000 launches per month in 2015, according to the KauffmanFoundation. (Kauffman expects similar findings for 2016.) But that doesn't meanwe make it easy.
TheWorld Bank report measures elements related to regulations, licensing, andtaxes, which--along with access to capital--are the most oft-citedentrepreneurial bugbears. The Affordable Care Act has emerged as the greathonking bull's-eye of critics' dartboards. However, just a small percentage ofU.S. companies are large enough to fall under its purview, so that's not themain problem. And some companies have capped their work forces at 49 tosidestep the requirement to offer employee health coverage. But that's a growthissue, not a startup issue.
Minimum wage, paid sick leave, and other regulations are abroader concern. (Company owners who haven't yet considered the implications ofthe federal overtime rule that goes into effect this December: tick, tick,tick....) But it's less any individual regulation than the accretion offederal, state, and local requirements--some of them contradictory--that makesentrepreneurship in the U.S. so daunting. According to a recent study by BabsonCollege, company owners spend, on average, four hours a week dealing withgovernment compliance.
The mere act of registering a business, which should be simple,often isn't. In bad times the relevant state or municipal offices may be onshort hours or even furlough days. (When you're starting a business whileholding down another job, free time to visit city hall may be nonexistent.)Just figuring out whether an area is zoned for a particular use can be ahassle. Fee calculations are typically dispersed, so the total cost ofownership is elusive. What, no one told you about that grease trap permit? Openingday postponed...
Keep in mind that this is a ranking. America's decline is also afunction of other nations' rise. In other words, we may not be getting worse somuch as other countries are getting better, faster. Interest in andfacilitation of entrepreneurship has been expanding internationally for years,as documented by Babson's Global Entrepreneurship Monitor and other sources.Countries putting in functional regulatory and legal infrastructures for thefirst time can operate without the decades-old albatross of existingregulations weighing down the United States. That potentially makes them morecompetitive.
The World Bank report includes a table listing countries that,in the past year, reduced regulatory complexity or strengthened legal institutionsin more than 60 areas. Many of those improvements would benefit startups. Socongratulations to Egypt and Niger for merging startup processes intoone-stop-shops; to San Marino for allowing companies to benefit from a 50percent corporate income tax reduction for their first six years of operation;and to Brazil for implementing an online portal for business licenses.
From the chart of significant improvements, the United States isnoticeably absent.
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