The Entrepreneurial Numbers Game

Q: How many researchers does it take to calculate the number of new businesses in the United States? A: It doesn't matter.

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My first assignment as INC.'s new man in Washington looked to be a snap: get a statistical handle on the much-bally-hood Age of the Entrepreneur. Take its pulse. Gauge its scope. Tell us how big it really is.

For an old hand at Pentagon coverage, this project promised a painless transition to the world of business journalism. And what with all the government bureaus, think tanks, and national organizations crammed into the capital city, each with its own research staff, economists, and computers, here was a first assignment assured of success.

Little did I realize that my journey into the bewildering jungle of economic analysis would suck me deeper and deeper into a kind of statistical quicksand. At each step, I learned a little more. And the more I learned, the less I knew.

The question was simple enough: How many new businesses are formed each year in the United States?The place to start, it seemed clear, was with the number of new incorporations, which had been accelerating briskly for more than a decade. In 1973, corporate commencements were running at an annual rate of some 330,000. Ten years later, they hit 600,000. To many, these numbers are proof of an economic robustness and renewed faith in the American dream.

"For those of us who have been looking at this for a while, the numbers are just breathtaking," said David Birch of Massachusetts Institute of Technology, who is perhaps the nation's most well-known authority on small-business activity. "When we hit 600,000, I said, 'That's it, it's got to plateau.' But it's been continuing at this blistering pace. It's approaching 700,000 now."

The sole source for these numbers on "new incorps" is The Dun & Bradstreet Corp., the country's premier business-research outfit, which sends its reporters each month to all 50 statehouses to count new certificates of incorporation. D&B's numbers are virtually regarded as gospel. As one government economist told me early in my inquiry, they are "the base from which everybody starts."

Thus I was somewhat taken aback when I finally reached D&B's chief economist, Joseph W. Duncan, on the telephone at his office on Park Avenue. "New incorps is a bad number," he was quick to caution. "A lot of people incorporate for future use or for tax or legal purposes and are not really measures of business activity."

Duncan gave the example of a real estate developer who decides to incorporate separately each cul-de-sac in a large housing development, in order to limit legal liability if things should unexpectedly take a turn for the worse. "From an economic point of view, it's one development. But from a new incorporation point of view, it might be 10. I look at that and say it's a fake number."

How much of this kind of activity is factored into the numbers, I wondered. Incorporation could reflect the changing legal status of an existing business -- a partnership or sole proprietorship -- rather than the birth of a new economic entity. Or it could reflect nothing at all -- just a shell corporation established by an individual with an idea or a scheme.

"You find a lot of problems with these sham corporations set up as tax dodges," explained Marc Levinson, a senior editor at Dun's Business Month, in New York City. "Take your typical family corporation. You have a regular salaried job, but you set yourself up as a corporation and channel money through it to yourself because there is some tax advantage for you. It's not really a business, and it has no economic significance apart from tax avoidance. The statistics on corporations are cluttered with companies like that."

Levinson's words were disheartening. I had expected to be on solid ground with the D&B figures, and now things were turning swampy. I could almost feel the quicksand oozing around my ankles.

Looking for help, I called the National Federation of Independent Business (NFIB). A Washington lobbying group with some 500,000 member companies, it seemed a likely repository of bedrock information on business formations.Instead, spokesman Jim Weidman expressed his own doubts about incorporation statistics.

"Given the litigious nature of virtually all business dealings now, if you are incorporated, at least you can limit your liability," Weidman explained, suggesting that many recent incorporations represent not so much a yen for entrepreneurship as a need to hide behind the legal protections of incorporation. "In a corporation, all you stand to lose is your business and your livelihood.If you're not incorporated, you can lose everything."

Weidman seemed to be on to something. A recent survey by the American Medical Association, for example, showed that 54% of all physicians in private practice are now incorporated, compared with 31% a decade ago. B. J. Anderson, an AMA attorney whom I reached by phone in Chicago, explained that the threat of malpractice suits was a major impetus for doctors to incorporate.

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