How Do Regulations Affect Small Firms?

Very small firms with fewer than 20 employees spend 45 percent more per employee than larger firms to comply with federal regulations. These very small firms spend 4 times as much per employee to comply with environmental regulations and 67 percent more per employee on tax compliance than their larger counterparts.

For data broken down by industry, see Cost of Federal Regulations by Firm Size, All Business Sectors (Dollars). Highlights of that report follow.

Highlights of Cost of Federal Regulations by Firm Size, All Business Sectors (Dollars) Report

  • This report details the distribution of regulatory costs for five major sectors of the U.S. economy: manufacturing, trade (wholesale and retail), services, health care, and other (a residual category containing all enterprises not included in the other four). The sector-specific findings reveal that the disproportionate cost burden on small firms is particularly stark for the manufacturing sector. The compliance cost per employee for small manufacturers is at least double the compliance cost for medium-sized and large firms. In the service sector, regulatory costs differ little from small to larger firms.

  • The disproportionality of the burden borne by small firms, identified in previous Advocacy studies, is further validated in this instance. On a per-employee basis, it costs about $2,400, or 45 percent, more for small firms to comply than their larger counterparts. The 2001 study, using a slightly different methodology, concluded that the disproportionality rate was higher - nearly 60 percent.

  • Environmental and tax compliance regulations appear to be the main cost drivers in determining the severity of the disproportionate impact on small firms. Compliance with environmental regulations costs 364 percent more in small firms than in large firms. The cost of tax compliance is 67 percent higher in small firms than the cost in large firms. In the aggregate estimates for all sectors, the cost per employee of economic regulations falls most heavily on large firms. The cost per employee of workplace regulations falls most heavily on medium-sized firms.

Cost of Federal Regulations by Firm size
All Business Sectors (Dollars)
    Cost per Employee for Firms with:
Type of Regulation All Firms < 20 Employees 20-499 Employees 500+ Employees
All Federal Regulation $5,633 $7,647 $5,411 $5,282
Environmental $2,567 $2,127 $2,372 $2,952
Economic $ 922 $ 920 $1,051 $ 841
Workplace $1,249 $3,296 $1,040 $ 710
Tax Compliance $ 894 $1,304 $ 948 $ 780

Source: The Impact of Federal Regulations on Small Firms (pdf), an Advocacyfunded study by W. Mark Crain, September 2005 (Research Summary #264).


Information courtesy of the Small Business Administration, Office of Advocacy.