Federal Regulations Costly for Small Businesses

Because many costs are fixed, small businesses pay about a third more per employee than larger companies, finds the SBA.

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The cost for small businesses to comply with federal regulations is higher than that of large ones, says a new report from the U.S. Small Business Administration.

Businesses with 20 employees or fewer pay 36 percent more than their larger counterparts (defined as those with 500 or more employees), says the report – called "The Impact of Regulatory Costs on Small Firms" -- from the SBA's Office of Advocacy. This is because a lot of costs are fixed -- the same whether you have two employees or 2,000. Total annual cost of following the rules for a small business: $10,585 per employee, or about $2,830 more than big business. Businesses with 20 to 499 employees paid about $7,454 per employee, or about $300 less than the largest companies.

"That is an unfair burden to place on American small business,' said Winslow Sargeant, the SBA's chief counsel for advocacy.

The report estimates that 89 percent of all firms in the U.S. employ fewer than 20 workers. By comparison, large firms account for only 0.3 percent of all U.S. firms.

Says the report: "If federal regulations place a differentially large cost on small business, this potentially causes inefficiencies in the structure of American enterprises, and the relocation of production facilities to less regulated countries, and adversely affects the international competitiveness of domestically produced American products and services."

The SBA adds: "All of these effects, of course, would have negative consequences for the U.S. labor market and national income."

Complying with environmental regulations was the biggest wallop to small business's wallet: It costs 364 percent more for small firms than large ones, or about 4 times more per employee. Small companies spend $4,101 per employee, compared to $1,294 at medium-sized companies (20 to 499 employees) and $883 at the largest companies. The cost of tax compliance is 206 percent higher for small firms.

Inc. contributing editor Courtney Rubin was for five years a London-based staff writer for People magazine. Rubin, a former senior writer for Washingtonian magazine, has written for the New York Times magazine, Time, Marie Claire, and other publications. She is the author of The Weight-Loss Diaries.