The Impact on Business Formation Because of Covid-19 Coronavirus

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The global pandemic has had an enormous impact on large and small businesses alike.

Not only have day-to-day operations had to change for many businesses (e.g. regular sanitation, social distancing), but some are seeing large-scale changes come into effect—and a lot of them may be permanent, such as remote working.

These changes are going to have short and long-term implications for economies across the world. In the United States, one great example of that is in business formation.

For business owners, the way you ultimately decide to form your business is one of the most consequential ones you could possibly make. It determines everything from how you’re taxed and how you seek funding (if you do at all) to the profits you’re able to make and the type of services you’re able to provide to customers.

But with everything that has happened because of the global pandemic, is it the right time to start a business? If so, what’s the best type of business to start in this uncertain period?

That’s what inspired us to write this guide.

We want to go deep into the numbers behind business formations and how COVID-19 has impacted them while giving context to how they’ll impact you. Later, we’ll also give you some resources to help your new business grow, no matter what business formation you choose.

Let’s dive in.

Disclaimer: All of the information we will cover in this article will focus primarily on the United States. Apologies to our international readers! However, if you work with business partners in the United States or you have a client or vendor based here, you will be able to gain a lot more context on the economic and business landscape they’re working in with information and data we’ll provide in this piece.

COVID-19 and Business Formations: 4 Key Pieces of Data

Data is crucial when it comes to your business, helping to guide your business decisions and provide context for the world you’ll be working in.

However, this information only tells part of the story. That’s why we want to give you a few crucial data points about business formation and how COVID-19 has impacted them—as well as reasons for why they’re important.

Data #1: Business formations dropped significantly due to lockdown measures in 2020

In March 2020, the United States was just beginning to come to grips with the fact that the novel coronavirus was a deadly serious issue. When that happened, we saw a rush of new protective measures, as well as mandates from states across the country to lock down and enforce mandatory stay-at-home orders.

When that happened, businesses were forced to make the tough decision to shut their doors, lest they add to the spread of COVID-19. As such, we also saw a significant drop in business formations.

In fact, the United States saw a 20% decrease in new business applications from March 1, 2020 through April 11, 2020 compared to the previous year.

Source: Economic Innovation Group

Data from the United States Census Bureau also discovered that different regions of the country were impacted in different ways.

For example, the northeast region of the country saw a 31% reduction of business registrations, whereas the western region “only” got hit with a 15% reduction. Altogether, the United States saw a bigger drop off in business applications than any other time during the Great Recession of 2008-2009.

This depicts a grim picture of business formations. But, it makes sense—after all, these are grim times. And when the number of applications dropped over a “sustained time period” during the Great Recession, they never rebounded to their pre-recession levels, according to the Economic Innovation Group.

So things looked bad across the board at the beginning of the pandemic in spring 2020. But does that mean things have stayed that grim or will be as bad again? Not necessarily…

Data #2: Business formations bounced back in a big way in 2020

As the year went on and summer arrived, people began to get more confident in applying for businesses. By Q3, the United States saw more business applications than it had in the previous 15 years.

Nearly 1,600,000 businesses applied for formation since the year began!

Source: U.S. Census

By October 2020, we saw an increase in business applications to the tune of 38.5% compared to the same time frame in 2019.

Source: U.S. Census

Altogether, 2020 is on track to be the year with more new, high-propensity business applications than any year in recent history. And that’s even with the drop-off in applications in the spring.

Source: Brookings

There are a few theories to why this is:

  1. Unemployment. Many people lost their jobs in the wake of the pandemic. With no consistent career to go to each day, many might have taken this as an opportunity to start their own business ventures.
  2. Stimulus. The $1,200 stimulus check as well as the Paycheck Protection Program rolled out by Congress in 2020 might have done its job in spurring confidence in entrepreneurs to start their own businesses.
  3. Backlog. Certain states and cities require business applications to go through the courts for approval. When the initial lockdowns happened, that meant that courts needed to be closed as well. When they opened back up, they were likely addressing a big backlog of business applications.
  4. New opportunities. With the pandemic came new needs in the market. Products and services from masks and sanitizers to home deliveries are seeing a boom in consumer demand. Many people might have recognized these demands and gaps in the market, and sought to fulfill it with their own businesses.
  5. Gig economy. This point ties into the first one. There is evidence to suggest that mass unemployment has led to many turning to become independent contractors via services such as Uber, Lyft, Grubhub, and Postmates. Most independent contractors fall under the “sole proprietorship” business formation (though they can be corporations, LLCs, or partnerships, too).

Regardless of the reason, many people should be heartened by the fact that business formations are now on the rise again. In fact, strong business formation numbers are a big indicator for an economy’s growth. It represents more jobs and income for the people within that economy.

Think of the economy right now as a powder keg. Each day, more and more gunpowder (i.e. businesses) gets added to the keg. It’s all waiting for the right time—when the pandemic is over or, at least, when a vaccine is widely available— for us to light it up.

Data #3: Business formations are looking better than the Great Recession

We’ve mentioned the Great Recession already. And it’s a pertinent thing to mention.

The housing market crash of 2008 brought with it a recession that many Americans are still suffering from. We’re seeing a lot of similar impacts, such as mass unemployment and sustained joblessness, due to the current global pandemic.

However, one area where it’s not the same is in business formations. In fact, business formations are doing much better than they were at a comparable time during the Great Recession.

Below is a chart showing the change in business applications through week 45 (November 2-8, 2020):

Source: Economic Innovation Group

In 2008, the United States dropped by 16.4% in business applications. However, in 2020, we saw a 14.3% increase in business applications when compared to the previous year.

One big factor that has helped in this (aside from the four points we outlined above) is because the economic foundation of the country is still pretty good. Housing prices are stable, as are most asset classes.

All things being equal, the United States is in okay shape.

The state of U.S. business formation is like a house that is currently going through a very bad storm. Our windows are broken. A tree crashed through our ceiling. And we probably can’t sleep in a few bedrooms. But the foundations of the building are still good, and we will be able to rebuild once the storm is over.

Data #4: Sole proprietorships are popular (and the pandemic likely made them moreso)

Even before the pandemic hit, sole proprietorships were the most popular type of business formations. That’s due to a combination of how easy it is to start and its lack of double taxation.


Source: Tax Foundation

In fact, you don’t even have to register as a sole proprietorship unless you’re going to conduct business under a different name (i.e., your “Doing Business As” name).

Sole proprietors encompass a lot of different types of businesses. For this data point, we’ll be focusing on freelancers in varying capacities and industries.

Freelancers are often sole proprietors because of how easy it is to get started. You just find a client, fill out a 1099 form, and you’re on your way.

And while we don’t have a lot of hard data on exactly how many sole proprietors have emerged because of the pandemic, we can make educated guesses based on a few factors:

  1. More people are freelancing now than ever before. In fact, 36% of the U.S. workforce is made up of freelancers. That’s an increase of 2 million people since the year before.
  2. Since 2019, freelancers have contributed $1.2 trillion dollars to the U.S. economy. That’s a 22% increase compared to the year before.
  3. 88% of current freelancers say they’re likely to keep freelancing in the future. That means there will likely be more sole proprietorships in the future.

Does this mean you should become a sole proprietor or that sole proprietorships are the best method of business formation? Not necessarily. It’s just an indicator of how people across the country have been coping with the impact of the pandemic.

However, it does tell us that there’s a demand for freelancers out there—especially since the vast majority of current freelancers intend to keep doing it in the future. In fact, 75% of freelancers who quit their full-time job to freelance say they earn more now than they did when they were employed by another entity.

How to Form a Business During a Pandemic

Starting a business in the middle of a pandemic is no small task. Heck, starting a business when we’re not in a pandemic is difficult enough.

However, there are plenty of people starting their own businesses right now to great success. So as long as there is demand for your products or services, there will be business for you.

To that end, here are a few tips for you to keep in mind when forming your business during a pandemic.

If you don’t know where to start, start small

There are five different types of business formations your business can take:

  • Sole proprietorship
  • Limited liability company (LLC)
  • Partnership
  • S-corporation
  • C-corporation

Some of them require you to file the business with your state or city. However, if you don’t have a lot of startup money or if you just aren’t sure where to start, we recommend you start smaller with a sole proprietorship. It’s the simplest type of business formation and it’s the easiest one to start.

You can get started as soon as you find customers. Plus, you don’t have to worry about filing fees or documents to sign (other than your tax documents).

However, a word of caution: Sole proprietorships mean that you are open to liability.

That means if you get sued by a disgruntled client and you lose the lawsuit, you’re going to have to pay for the damages out of your own pocket. That opens up your personal assets for seizure by courts, including your car, house, or savings account.

That might seem scary, but the chances of that happening are very small. So, as long as you provide good service and treat your clients fairly, you shrink the window of risk for that happening.

Starting small also refers to practically every other aspect of your business, including the website, marketing, and the products/services you provide. In fact, to get a business running you really only need a website and a good way for your customers to get into contact with you (which can be a function of your website!).

Go deeper: For a comprehensive list of resources to help you start your business, check out our articles on entrepreneurship.

Find an evergreen business

It’s no secret that many businesses that were thriving before the pandemic are suffering greatly now. From loss of income and letting employees go to catastrophic supply chain troubles, the list is endless.

However, there are plenty of businesses out there that are actually in fine fettle. In fact, there are many that are doing even better than they were before.

Take this chart for example:

Source: McKinsey and Company

As you can see, those that are experiencing the greatest financial risk and impacted the most by the pandemic are industries like food service, transportation, education, and entertainment.

The ones that are doing well are those such as finance and insurance, company management, real estate, healthcare, and construction.

Does this mean that you should run and start up an insurance company right now? Not at all. It’s just an indicator of the type of businesses that are more resilient than others in our current situation. These evergreen industries last a long time and can persist through bad periods like a global pandemic.

If you’re looking for some inspiration, the US Chamber of Commerce provides a great list of business types that thrive during the pandemic. They include:

  • Delivery services. From groceries, to meals, to home goods, delivery services of all stripes are in high demand as people stay at home during lockdowns and for fear of catching COVID-19.
  • Cleaning services. This includes commercial sanitation of offices and other workplaces, along with medical-grade sanitation for medical facilities.
  • Liquor and wine stores. Crack open a cold one with the boys (over Zoom, of course). Alcohol suppliers of all stripes are doing well as people turn to the world’s oldest way of taking the edge off.
  • Virtual tutoring/education. As schools shift to online learning, parents are hiring virtual tutors at a high rate. Also, online courses for adults are seeing a boom as people stay indoors and need a way to occupy their time.
  • Home health services. Looking to avoid clogging up hospitals with non-emergency visits, people are looking to bring healthcare home with home health services. These are medical providers who will consult you online and/or come to your home to assist you. It doesn’t just have to do with physical health either. Mental health providers are also in high demand.

Basically any business that allows your customer to be at home and receive your products or services is a good one for the pandemic.

It’s also worth mentioning that the marijuana industry is also booming right now. With the stress of the pandemic as well as the rise in marijuana legalization, people are turning more and more to Willie Nelson’s favorite pastime. A (legal) startup centered around getting people their jazz cigarettes is one that has the potential to do really well.

(Talk about evergreen business. Am I right?)

Nail your digital marketing

Digital marketing played a big role in modern businesses well before the pandemic. Now, it’s downright essential that you nail all facets of it if you want your business to be discovered and successful.

After all, traditional methods such as subway ads, newspaper ads, and billboards are seeing a dramatic decline due to the pandemic. And while digital advertisements have seen a similar decline, we would argue that it’s more important than ever to know how to position yourself on the internet to draw in more customers.

That’s because when people can’t go out for entertainment, they turn online. If you have a service that they can do from home, your digital marketing efforts will have an impact.

To that end, there are three areas you should focus on to start laying the groundwork for your digital marketing strategy:

  • Know your brand’s story. This is one of the most powerful ways you can win the hearts and wallets of customers. Being able to effectively tell your company’s story is a good way to connect emotionally with your customers. When you connect with them emotionally, they’re going to be more willing to click through, sign up for a newsletter, or purchase a product. Learn more about developing a brand story here.
  • Create your marketing framework. This is the overall system you will be building in order to create a sustainable marketing practice. Remember: Your marketing is more than just one campaign or one funnel. It’s an entire framework you build in order to create a sustainable, scalable revenue engine for your business. After all, you wouldn’t start building a house without the blueprints—why should you jump into marketing without a plan? Learn more about creating a marketing framework here.
  • Find where your customers live. No, I don’t mean literally (unless you want a sweet restraining order). The best way to increase traffic to your website (and, therefore, customers to your business) is by going to where they are online and letting them know you exist. Identify the Facebook groups they like to frequent, the subreddits they subscribe to, or the Quora communities they ask questions on. Of course, that’s not the only way to build web traffic. You can also draw them in by offering great and helpful content on your website using the principles of inbound marketing. Learn more about increasing web traffic here.

Only by developing a good digital marketing strategy can your business succeed in attracting customers in the pandemic age and beyond.

Conclusion

The SARS-CoV-2 pandemic has changed the way we form and conduct business. While there is a lot of pain around, there are also signs of good things to come.

The best thing for you to do is to take action on the things that you can control and ignore all the rest. That means creating a business and positioning it for success.

No matter what type of business you choose, Quicksprout is here with the resources to help you through this time. Remember, we’re all in this together. We want to be there for you when you need us the most.

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