As technology continues to lower the barriers to entry, the number of sole proprietors nationwide is increasing rapidly, according to the latest figures from the U.S. Census Bureau.
The report entitled "Nonemployer Statistics: 2005" -- the latest year for which data is available -- found that there are 20.4 million businesses without a payroll, an increase of 4.4 percent from 2004. On average, 2,356 Americans started new businesses every day. Nonemployer businesses, those in which there are no paid employees, make up 78 percent of all U.S. businesses.
The sizeable growth in nonemployer businesses is unusual compared to Census data on businesses in general, according to Brian Headd, an economist at the Small Business Administration. "We haven't been seeing the increase there in recent years that we've been seeing in the nonemployer businesses," Headd said.
This growth is driven by a rise in the number of technology-related nonemployer businesses, according to Headd. Market forces are driving down the cost of technology, which makes it more cost-effective for people to start small ventures in technology-related fields.
The Census statistics reflect this trend. Of the 860,000 new nonemployer firms added in 2005, Internet businesses showed the most growth, with the number of Web search portals and Internet service providers increasing by 41.2 percent and 16.6 percent, respectively. The number of electronic shopping and mail-order houses also grew 12 percent.
Certain geographic regions experienced growth rates almost twice as high as the national average, including Washington, D.C. (9.6 percent), Nevada (7.7 percent), and Florida (7.6 percent). This is not surprising considering the overall growth in these regions, Headd said, citing continued expansion in D.C., Las Vegas, and Orlando. "When an area has a population increase it tends to do well in terms of small business," Headd said. "It seems to be linked to an urban region doing well."
While nonemployer businesses make up the majority of U.S. firms, they do not contribute substantially in terms of overall sales and receipts. Many of these businesses are part-time ventures that are not the owner's primary source of income.
However, self-employed individuals are still important, according to Headd. "It's often the stock from which employees are born," he said. "For a good baseball team you need a good farm system." He added that having a second source of income from a nonemployer business can allow individuals to improve their standards of living and learn new skills.
Data on nonemployer businesses is derived from filings with the Internal Revenue Service. The data do not include about a million self-employed individuals with paid employees. Statistics for 2004 and 2005 may be low due to late filings from regions affected by Hurricanes Katrina and Rita.