Why Americans Are Starting Small Businesses at a Record Pace

Americans started a record number of small businesses in 2020, and the trend has continued into 2021. This is due primarily to three factors: (1) economic necessity; (2) financial assistance from the Coronavirus Aid, Relief and Economic Security (CARES) Act of 2020; and (3) the growth of ecommerce.

In this article, we explain how these factors are helping to foster new companies and keep existing ones in business during the global economic downturn. 

If you are thinking about starting a new business, now is the time—take a look at our How to Start a Business guide.

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Economic Necessity is Driving Business Startups

It’s no secret that businesses of all sorts have suffered during the Covid-19 pandemic. This has produced unemployment levels in the U.S. not seen since the Great Depression.

In part as a result, Americans have turned to starting their own businesses in record numbers.

“There are parts of what is going on that feel very similar to 2001 when I became an entrepreneur,” says Richard Sheridan, CEO of Menlo Innovations. “I had lost my job in the dot-com crash and I chose entrepreneurship over unemployment. I'm guessing many others are making a similar choice.”

Monty Hamilton, CEO of Rural Sourcing, agrees.

“We believe that part of this increase in the startup pace is driven by the old ‘mother of all invention’ – necessity,” he says. “With 10 million jobs lost during the pandemic, many of those former employees have been pushed into becoming entrepreneurs.”

The CARES Act Provided Crucial Assistance

Additional encouragement for new businesses has come from aid to companies and individuals provided by the CARES Act.

First, the Paycheck Protection Program (PPP) under the Act reduced the risk of starting a new business and helped existing small businesses by offering full loan forgiveness if the loan proceeds were spent on payroll costs and other eligible expenses. Second, increased unemployment benefits under the CARES ACT provided many people with the financial means to start new businesses.

In part because of these factors, according to a 2020 survey by Lending Tree based on US Census Bureau data, there was a large spike in business applications after the CARES Act was signed into law on March 27, 2020.

In particular, between the week of March 22 and the week of July 12 when PPP loans and supplemental unemployment insurance was being paid out under the CARES Act, weekly business applications for non-store retailers grew from 5,070 to 20,370.

Not only has the CARES Act encouraged people to start new businesses, it also has helped existing companies weather the economic downturn.

“We were helped tremendously by the loans provided by the PPP program,” says Sheridan. “Our business shrank 60% year-over-year, and we are finally starting to see growth again.”

Hamilton also said the PPP helped his business – especially the option to defer payroll taxes.

If you’re planning on starting a business, our guide to LLCs can help you decide if this business structure is right for your company. In addition, our S corps guide explains all about this particular tax status.

Ecommerce Growth Brings New Opportunity

While starting a physical store currently isn't the best option for most people because of COVID-19, the growth of ecommerce in recent years – and especially since the pandemic started – has presented a viable alternative for new small businesses and has helped keep existing ones afloat.

We are seeing great tailwinds due to the accelerated adoption of new technologies, partly driven by the pandemic,” Hamilton says. “Many businesses were forced to more quickly adopt cloud technologies and digital transformation due to the need to take ‘friction’ out of the consumer journey. These efforts require firms like Rural Sourcing to assemble experienced teams to help clients determine the appropriate technology stack and then implement these solutions.”

Sheridan said his company has also used ecommerce to promote and sell tours and classes. Whereas this used to be done in person, he says, “now it’s 100 percent virtual.”

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How to Start a Business

Starting a business is challenging and requires sufficient time, money, and personal and professional support. Our Entrepreneurship Quiz can help you determine if you’re ready. 

The basic steps in starting business include:

We explain these steps briefly below. For more information, see our guide How to Start a Business.

For more information on how to start a business in your state, see the following state-specific business guides.

Choose an Idea

The first step is to choose a business idea that is appropriate for your personal goals, abilities and interests. Our Business Idea Generator can help you get started.

Plan your Business

Any successful business needs a good business plan that covers important areas like the name, product development, sales and marketing, people and partnerships, and financial planning. Our Business Planning Guide helps you analyze your business idea and gets you access to free planning tools.

Form a Company

Next, you need to choose a business structure, whether that’s an LLC, corporation, partnership, or nonprofit. See our guide on How to Choose a Business Structure for more information.

Register for Taxes

Most businesses need an Employer Identification Number (EIN), also known as a Tax ID Number, to identify the business for federal tax purposes. In addition, your business may be subject to various state taxes.

Get Business Banking Accounts

Protect your personal assets by keeping your business dealings separate. This means, among other things, using dedicated business banking and credit accounts.

Set up Accounting

A good accounting system makes filing taxes easier and helps you track business performance. Our guide explains more about the importance of accounting and how to get started.

Obtain Permits & Licenses

Depending on the type of business you have, federal, state, and local government regulations may require you to obtain one or more business permits and/or licenses. Read our guide to obtaining licenses and permits and learn how a professional service can help you.

Get Insured

All small businesses should get business insurance to help manage risks. Common types of business insurance include general liability insurance, workers’ compensation insurance, and professional liability insurance.

Define Your Brand

A strong brand should incorporate what your business stands for, support your core values, and address how you will earn your customers’ trust. You also need to choose a business name that’s consistent with your brand and promote your business through social media and press releases.

Establish a Web Presence

A professional website is crucial because it enhances your business’s credibility and allows potential customers to find you.

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