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Introduction to Business 2e

5.3 Small Business: Driving America's Growth

Introduction to Business 2e5.3 Small Business: Driving America's Growth

5.3 Small Business: Driving America's Growth

  1. How do small businesses contribute to the U.S. economy?

Although large corporations dominated the business scene for many decades, in recent years small businesses have once again come to the forefront. Downsizings that accompany economic downturns have caused many people to look toward smaller companies for employment, and they have plenty to choose from. Small businesses play an important role in the U.S. economy, representing over 40 percent of U.S. GDP and employing nearly 50 percent of the private sector workforce.

What Is a Small Business?

How many small businesses are there in the United States? Estimates range from 5 million to nearly 40 million, depending on the size limits government agencies and other groups use to define a small business or the number of businesses with or without employees. The Small Business Administration (SBA) established size standards to define whether a business entity is small and therefore eligible for government programs and preferences that are reserved for “small businesses.” Size standards are based on the types of economic activity or industry, generally matched to the North American Industry Classification System (NAICS).10

Small businesses are defined in many ways. Statistics for small businesses vary based on criteria such as new/start-up businesses, the number of employees, total revenue, length of time in business, nonemployees, businesses with employees, geographic location, and so on. Due to the complexity and need for consistent statistics and reporting for small businesses, several organizations are now working together to combine comprehensive data sources to get a clear and accurate picture of small businesses in the United States. Table 5.4 provides a more detailed look at small-business owners.

Snapshot of Small-Business Owners
  • Business creation and ownership has been on the rise since 2014 and continues to grow at a faster pace than ever before.
  • Start-up activity has been on a steady rise since 2021, reaching over 20 percent in 2025.
  • Nearly half of business owners start their business to fill a gap or solve a problem rather than out of necessity.
  • There are nearly 40,000 small businesses that are making between $1 million and $2.5 million per year.
  • 20 percent of businesses do not make it through their first year, with only half making it to their fifth year of operation.
  • Only about one-third of businesses remain in business longer than a decade.
Table 5.4 Sources: Mehdi Punjwani and Sierra Campbell, "Small Business Statistics in 2024," USA Today, https://www.usatoday.com, October 16, 2024; The AFE Editorial Team, "Why Most Entrepreneurs Start Businesses," Association for Entrepreneurship, https://afeusa.org, November 18, 2024; Wendy Edelberg and Noadia Steinmetz-Silber, "The Changing Demographics of Business Ownership," The Brookings Institute, https://www.brookings.edu, April 23, 2024; "How Long Businesses Survive and Why They Fail," https://www.clearlypayments.com, accessed March 3, 2026; Ricardo, "33 Entrepreneurship Statistics in 2026: Global Trends, Challenges & Insights," Hostinger, https://www.hostinger.com, January 13, 2026.

One of the best sources to track U.S. entrepreneurial growth activity is the Ewing Marion Kauffman Foundation. The Kauffman Foundation is among the largest private foundations in the country, with an asset base of approximately $2 billion, and focuses on projects that encourage entrepreneurship and support education through grants and research activities. In 2025, they initiated a three-year distribution of over $30 million in grants.11

The Kauffman Foundation supports new business creation in the United States through two research programs. The annual Kauffman Indicators of Entrepreneurship measures and interprets indicators of U.S. entrepreneurial activity at the national, state, and metropolitan level.12 The Kauffman Indicators of Entrepreneurship annual reporting measures how people and businesses contribute to America’s overall economy. What is unique about the Kauffman reports is that the indexes don’t focus on only inputs (as most small-business reporting has been done in the past); it reports primarily on entrepreneurial outputs—the actual results of entrepreneurial activity, such as new companies, business density, and growth rates. The Kauffman Indicators of Entrepreneurship include comprehensive, interactive data visualizations that enable users to explore entrepreneurial trends nationally and at the state level.13

The Kauffman Indicators of Entrepreneurship consists of three separate indicator series: Early-Stage Entrepreneurship Indicators, New Employer Business Indicators, and Entrepreneurial Jobs Indicators.

  • The Kauffman Early-Stage Entrepreneurship series focuses on new business creation activity and people engaging in business start-up activities using the following components: rate of new entrepreneurs, opportunity share of new entrepreneurs, start-up early job creation, and start-up early survival rate.
  • The New Business Employer series compiles data about trends in new employer businesses and the impact on overall payroll in the United States. The components in the series include: rate of new employer business actualization, rate of new employer businesses, new employer business velocity, and employer business newness.
  • The Kauffman Indicator Entrepreneurial Jobs series provides information about the types and quantities of private sector jobs with comparisons among industries and geographic regions. The components included are contribution, compensation, creation, and constancy.

Data sources for the Kauffman Indicators of Entrepreneurship calculations include the Current Population Survey (CPS), Bureau of Labor Statistics Business Employment Dynamics (BED), Business Formation Statistics (BFS), Business Dynamics Statistics (BDS), and Longitudinal Employer-Household Dynamics (LEHD).

Small businesses in the United States can be found in almost every industry, including services, retail, construction, wholesale, manufacturing, finance and insurance, agriculture and mining, transportation, and warehousing. Typically, small businesses are defined as companies that have fewer than 500 employees, but that can vary based on industry and specific standards established by the Office of Advocacy. Table 5.5 provides the breakdown of small business by the number of employees.

Number of Employees, by Percentage of Established Small Businesses
Number of Employees Percentage of Businesses
1–4 78.43%
5–9 12.17%
10–19 5.09%
20–49 2.58%
50–99 0.96%
100–249 0.56%
250–499 0.002%
Table 5.5 Source: "Detailed Business Counts," https://www.naics.com/business-lists/counts-by-company-size/, accessed March 3, 2026.

Concept Check

  1. What are three ways small businesses can be defined?
  2. What social and economic factors have prompted the rise in small business?
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