Useful Stats: Business applications trending up, share of high-propensity applications trending down, 2005-2023

Business applications have greatly increased over the last two decades, jumping 119% from 2005 to 2023. However, the rate of high-propensity business applications—applications identified by the Census Bureau as having higher likelihoods of turning into businesses with payroll—have decreased as a share of all applications every year since 2005, despite having grown 22% over the same period. Breaking these numbers down by states shows uneven trends, with the difference in shares of high-propensity business applications in 2005 and 2023 decreasing by over 20 percentage points in most states.

This article uses monthly data on seasonally adjusted business applications downloaded from Business Formation Statistics (BFS). These data were developed at the Center for Economic Studies in research collaboration with economists affiliated with the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of Atlanta, the University of Maryland, and the University of Notre Dame. For this article, these data were annualized by taking the sum of each month in a given year.

Data for both total business applications and the subset of those defined as high-propensity are used in this article. When characterizing high-propensity businesses, the Census Bureau uses information from IRS Form SS-4, an IRS form used for filing EIN applications. For the specific characteristics used, refer to the Census Bureau’s “Business Formation Statistics—Definitions” page.

National overview of business applications

The overall number of business applications has been steadily increasing since 2009, following the 2008 financial crisis, before spiking at the onset of the pandemic with a 24% jump between 2019 and 2020. While this trend has slowed in recent years, values remain much higher than pre-pandemic levels (see Figure 1, below).

Rates of entrepreneurship tend to increase during recessionary periods as unemployment rises and job openings become fewer and more competitive. A past SSTI article explores job openings, hires, and separations across the past three major recessions in the U.S.—the COVID-19, Great, and Dot Com Recessions—revealing decreased job openings and hires, as well as increased separations, a trend especially pronounced during the COVID-19 recession.

However, in times of recession, many entrepreneurs start businesses not because they have an innovative, profitable, or scalable business idea but instead out of necessity. Necessity-based entrepreneurs are oftentimes unemployed at the time of starting their business, in need of money or flexibility; they can also simply be pursuing a passion.

While levels of necessity-based entrepreneurs are found to be elevated in periods of recession, they are not necessarily short-lived or unproductive; many are successful. Opportunity-based entrepreneurs—those pursuing an opportunity in the market rather than acting out of necessity—are associated with growth-oriented businesses. While these do not necessarily translate into high-propensity businesses as defined by the Census Bureau, the concept does help explain recessionary data trends.

Annualized BFS data tracking business applications from 2005 through 2023 shows that the overall quantity of business applications increased by 119% from 2005 to 2023, averaging a 5% increase each year and decreasing in only three years (2008, 2009, and 2022). The largest increases were at the onset of the pandemic, from 2019-2020 and 2020-2021, at 24% and 23% respectively. These increases conform with the trend of increased entrepreneurship during the pandemic.

Figure 1: Total and high-propensity business applications over time, 2005-2023

While total business applications have been on the rise, so have those of high-propensity businesses. Figure 1 shows that applications for high-propensity businesses sharply fell by 17% between 2007 and 2008 and slowly increased each year from 2012 to 2018. After a small 1% drop from 2018 to 2019, applications rose 13% going into 2020 and 21% from 2020 into 2021. A short dip of 7% in high-propensity business applications occurred in 2022 but quickly recovered going into 2023 (+8%; 1% higher than the 2020 value). Overall, from 2005 to 2023, the quantity of high-propensity business applications grew 22%.

Despite these increases, the number of high-propensity business applications has been declining as a share of all applications across the available data. In 2005, high-propensity business applications accounted for 58% of all business applications, but in 2023 they dropped to 32%. On average, the share of these applications decreased by 3% annually but dropped especially large amounts, 12% and 9% from 2007 to 2008 and 2019 to 2020, lining up with the two major recessionary periods within the data set.

While this is consistent with the thought that necessity-based entrepreneurship increases during recessionary periods, it is interesting to note that the decreasing share of high-propensity business applications has not recovered, but instead continues to consistently decrease. Thus, the more rapid growth of total business applications compared to the high-propensity subset may be due to a variety of outside reasons such as increased access to the internet and digital commerce platforms, and simply exacerbated by recessionary periods.

State-level overview of business applications

As with many metrics in the U.S., national trends do not reflect evenly across the states. The share of high-propensity business applications is no exception; while having decreased across all states and Washington, D.C., the extent to which each geography decreased varies greatly.

In 2005, Florida had the largest share of its business applications being high-propensity at 71%, followed by Illinois at 64%, Nevada at 63%, and California and New York each at 62%.

Connecticut had the lowest share of high-propensity business applications at 45%, Wisconsin and D.C. each had 47%, and Louisiana had 48%.

The vast majority of states, 45, had greater than 50% of their business applications defined as high-propensity in 2005.

Fast-forward to 2023, and the picture changes quite a bit; not a single state nor D.C. has a high-propensity business application rate greater than 50%. In fact, New York, the state with the largest share of these applications is at 42%, three percentage points lower than the state with the lowest rate in 2005.

California follows with the next largest share of high-propensity business applications at 40%, trailed by Massachusetts at 39%, Maine at 38%, Illinois at 37%, and Florida at 34%.

Wyoming had the smallest share of business applications defined as high-propensity, at just 19%, followed by New Mexico at 24%, and Utah, South Carolina, Ohio, Montana, Michigan, Louisiana, D.C., and Alabama each at 28%.

Figure 2 shows data for each state and D.C.’s share of high-propensity business applications from 2005 to 2023. The color scale used in Figure 2 was based on the highest and lowest overall values across all years rather than rescaled for each year’s values to emphasize the decrease.

Figure 2: Share of high-propensity business applications by state, 2005-2023.

Comparing the share of high-propensity business applications from 2005 to 2023, Connecticut and Massachusetts decreased the least with a 16 percentage point difference each, followed by Wisconsin at 17 points, D.C. and Louisiana at 19 points, and Kentucky, New Hampshire, New York, and Vermont each with their 2023 share at 20 points lower than their 2005 share.

On the other end of the spectrum, Wyoming-based high-propensity business applications dropped by 41 percentage points, from 60% to 19%, followed by Florida at 37 points, Nevada at 33 points, New Mexico at 31 points, and Georgia at 28 points.

This article was prepared by SSTI using Federal funds under award ED22HDQ3070129 from the Economic Development Administration, U.S. Department of Commerce. The statements, findings, conclusions, and recommendations are those of the author(s) and do not necessarily reflect the views of the Economic Development Administration or the U.S. Department of Commerce.