New business applications are on the rise – here’s what led to a record-setting year

Leandro Mortenegro

STATEN ISLAND, N.Y. — Unprecedented layoffs, increased unemployment benefits and pandemic stimulus checks have led to an uptick in new business ventures, a new report notes, citing the filing of a record 5.4 million new business applications with the IRS during the 2021 fiscal year.

“Recessions often spur new business ventures, but the growth out of the pandemic-induced recession was much more profound than anything seen in the wake of the much longer 2008 recession,” noted data journalism website Stacker, which recently analyzed U.S. Census Bureau Business Formation Statistics data from 2004 to 2022 to investigate trends in new business applications.

“For perspective,” Stacker notes, “it took from 2009 to 2016 (about seven years) for business applications to increase by 22%, whereas applications grew more than that in both 2020 and 2021.”

According to the report, the IRS received more than five million business applications in 2021—a peak since the U.S. Census began producing the Business Formation Statistics report in 2004. The report showed that there were about 1 million more business applications in 2021 than in 2020, which was also a record-setting year.

“The first half of 2022 is trailing slightly behind last year, with 2.5 million applications through June compared to 2.8 million at the same time last year,” Stacker said. “While the growth may be slowing, entrepreneurs have still started more businesses recently than in years past.”

Most new business applications involved some sort of retail venture, according to Bureau of Labor Statistics data, which has led all industries since 2016.

“Even as retail stores temporarily closed, boarded up their windows, and laid off employees, many more potential retailers entered the scene,” Stacker reports, citing a New York Times article that listed sole proprietorships—individuals selling their own goods primarily online—as a replacement for shops that closed during the pandemic.

“Some retail subcategories grew sales in 2020, including online shops, food and beverage stores, and hobby stores,” Stacker continues. “Online shopping, in particular, gained immense popularity amid local restrictions on businesses and gatherings during COVID-19 spikes and has continued to grow sales since then, according to Census quarterly retail e-commerce reports.”

According to the U.S. Census Bureau, small businesses employ a little more than half of the American workforce, so adding more of them could propel the economy.

The true test, though, will be how many applications actually turn into businesses with payrolls.

“The Census determines whether an application is likely to develop into a business with payroll by looking for a few characteristics, including a plan to hire employees, a planned date to pay first wages, a certain collection of industries, and whether the application is from a corporate entity,” Stacker notes. “The number of applications with planned wages has also increased compared to previous years but hasn’t hit record levels.”

However, just 32% of business applications in the first half of 2022 were deemed likely to turn into businesses with payroll, compared to 58% in 2005. And since many applications came from self-employed individuals who may have been laid off and sought new ways to make a living rather than entrepreneurs with long-term dreams to create growing businesses, those numbers may decline even more.

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