Smiling female entrepreneur using laptop while talking through smart phone
As spring approaches, things are looking up. The economy continues to improve and the Biden administration recently announced there will be enough vaccines for every adult in America by May. Some states are so excited to get back to normal that they are lifting mask mandates and allowing businesses to open to capacity.
But while economists are predicting strong growth in the second half of the year, there are still a lot of labor market adjustments that need to occur. Thousands of businesses have closed, many permanently, and millions of people have been working from home for nearly a year. Yet despite the economic challenges, entrepreneurs continue to start new businesses. And with the right policy changes, home businesses in particular could be a key component of the economic recovery.
A recent study from the Center for Research On the Wisconsin Economy at the University of Wisconsin shows that business formations have been surprisingly strong over the last year. Economist Simeon Alder analyzed data on weekly applications for Employer Identification Numbers—which new businesses are required to obtain from the IRS for tax purposes—and found that weekly applications were above trend. As shown below, there is a big jump in applications (purple line) starting in late April/early May of 2020 and they remained above trend for the rest of the year and into 2021 (blue line).
Business applications by year and month, 2017 - 2021.
He also documents a positive relationship between business applications and subsequent gains in employment in many states, meaning the business formations that have occurred so far may help power the economic recovery as the pandemic wanes.
While it is not clear where all these new businesses are located, many begin in people’s homes. Microsoft
With so many people working from home over the last year, it is likely that many of the new businesses started over the last six months are operating out of someone’s home. In fact, prior to the pandemic, home-based businesses (HBBs) were an economic bright spot. As an article in City Journal from last summer noted, the number of HBBs nearly doubled from 1992 to 2012, and by 2014 HBBs represented one in six businesses.
But while total HBB growth has been strong, it is not easy to start or operate one in many parts of the country. A 2020 report by researchers Olivia Gonzalez and Nolan Gray discusses the history of HBB regulation and gives an overview of the current regulatory landscape that exists in many cities.
They highlight Charlotte as an example of a city with regulations that impede HBBs. The city only permits specified HBBs and it mandates performance standards, such as a prohibition on equipment that is “not normally part of a household”, a prohibition on having non-resident employees, and rules regulating how much of a home’s floor area an HBB can occupy.
Many cities also prohibit customers from being on-site at an HBB, meaning the proprietor must travel to interact with customers. This requirement alone makes it practically impossible to operate certain businesses from home, such as a small salon, barbershop, or retail outlet selling homemade goods.
Then there are the fees. Charlotte charges a permit fee of $145, which is on the high end. Louisville, Kentucky, for example, only charges $25. Other cities, such as Las Vegas, charge recurring annual fees based on revenues, which raises operating costs for HBBs since “…it forces operators to keep sophisticated financial records”.
Gonzalez and Gray suggest several policy recommendations that would make it easier to operate an HBB. One is creating a “no impact” category that would allow HBBs that do not impact nearby properties to operate without burdensome licensing or permit requirements. Another is eliminating vague performance standards that are not tied to measurable health and safety impacts, such as floor area and equipment restrictions.
There is no better time than now for cities and states to reform regulations affecting HBBs. In addition to helping the economic recovery, policy reform would also complement efforts in the private sector that are making it easier than ever to operate a successful HBB.
West Tenth, for example, is an app that provides a digital marketplace for HBB owners. West Tenth makes it simple for HBBs to advertise their products or services, communicate with potential customers, and receive payments for their services. West Tenth is currently operating primarily in Southern California and Salt Lake City, but it accepts HBBs from anywhere and has plans to expand nationally later this year.
Picture of West Tenth app
West Tenth was co-founded by Lyn Johnson and Sara Sparhawk with the goal of helping talented people, especially women, get their products and services in front of customers. As Lyn and Sara told me in a recent conversation, women often have talents they have developed over their lifetimes that are underutilized, such as planning and creating memorable family celebrations. As Lyn put it:
“As a mom myself, I’m expected to be able to throw together a Pinterest-worthy birthday party at a moment’s notice…quite frankly, this kind of thing takes a real talent that I don’t have. But I know there are women just around the corner from me for whom these things are easy, effortless even. I want an easy way to reach out to them, put money in their pockets, legitimize their talents, and have them bring these things into my home.”
Like Lyn, Sara’s own experiences inspired her to start West Tenth. Sara’s stay-at-home mother had a HBB that she wanted to grow, but ultimately it was too difficult to acquire customers. As Sara put it, “I saw firsthand my mom wanting to do this so she could have a flexible job, she could feel fulfilled…so [West Tenth] really resonated with me.”
Sara hopes West Tenth will remove the barriers her mother faced so current HBB owners can grow their businesses and achieve their financial goals.
The gig economy was transformed by
A robust culture of entrepreneurship is vital for a strong economy, and new businesses are especially important today due to the economic damage caused by Covid-19. But while the private sector is doing its part, not enough state and local governments are. There are still too many regulations on the books that hinder HBBs and other small businesses. Now is the perfect time for state and local governments to ramp up the removal of these barriers so companies like West Tenth can help entrepreneurs succeed.
