This analysis is interested in the prevalence of paper entrepreneurs, people who self-identify as self-employed or operating their own business but whose business registers no sales. An example of this kind of entrepreneur might be an unemployed person who works as a “consultant” (and lists themselves on LinkedIn as such), but do not have any clients. Another might be someone who claims to have an actively-managed business in order to construe and write off household expenses as business expenses in order to maximize tax deductions.
I expected to see a secular rise in the prevalence of no sales businesses for at least three reasons. First, I was under the impression that America’s tax system and business enviornment evolved to encourage small businesses formation. Many “zero sales” businesses might be startups at their very earliest stages of development. Given overall rates of entrepreneurship seem to have remained unchanged1, I expected the pool of small businesses to be have proportionally more startups than in the past.
Second, I presumed that the evolution of taxes would create incentives for households to declare business ownership and push household transactions through those businesses as a tax management strategy. I thought that either new regulations or laws created new opportunities to save money in this way, or that new technologies made it easier for people to recognize and capitalize on business deductions (e.g., Turbotax may alert people to the potential for business deductions, and give people a means to capitalize on them).
Third, the title of “entrepreneur” is more socially desirable than that of a retiree or unemployed, and I expected more people to assume these roles when creating public identities on web sites like LinkedIn or on their resumes. Given that job precarity and the forced “retirement” of older workers are widely-discussed as major trends, I thought there was a potential for this dynamic to raise the proportion of “zero sales” entrepreneurs.
Data and Methods
We use data from the Survey of Consumer Finances2 This analysis only considers entrepreneurs who own actively-managed businesses. The other group traditionally counted among entreprneurs – those who self-identify as self-employed – are not included because their business transacting data is not in the data set. We are interested in the percentage of households whose actively-managed businesses collectivelygenerate no sales. If a household has one business with sales, then they are not countes as zero sales entrepreneurs.
The figure below depicts the estimated percentage of business owners who make no sales. Since 1992, the proportion of actively-managed businesses that registered no sales appeared to bounce within the range of 8.8% (in 2001) and 11.8% (1995). I am not strongly confident that the large change from 1989 to 1992 represents a real change, or whether it is a byproduct of any differences in the survey or sampling mechanisms in these surveys.
To some degree, this was an unanticipated finding to me. I found many reasons to expect a rise in these kinds of businesses. These failed expectations could be the result of faulty presumptions, including:
- Zero sales businesses may not signal business startups
- Tax policies or economic regulations did not change the ease of forming new businesses
- Tax policies or technology did not change in a way that sufficiently encouraged enough people to form businesses for the purpose of tax management.
- Comparatively few people usurp the role of “entrepreneur” to cover up unemployability
- Cohen, J. N. (2019, March 1). Prevalence of Entpreneurship among U.S. Households, 1989 – 2016. Retrieved from <osf.io/q5xmu>↩
- Federal Reserve “Survey of Consumer Finances” Data from triennial survey, 1989 to 2016. Available for download at https://www.federalreserve.gov/econres/scfindex.htm↩