Sole Proprietorship Revenues in Long Term Decline

Source: Create from data from the IRS Statistics of Income

Here’s some sobering news for those people thinking of going into business for themselves. The average revenues of sole proprietorships has been trending downward for the last 50 years!

As the figure above shows, the average receipts per U.S. sole proprietorship has dropped by two-thirds in inflation-adjusted terms since 1966. Because three quarters of all U.S. businesses are sole proprietorships, this trend is not good for small business.

Revenues at the average sole proprietorship appear to be dropping because their numbers have been growing rapidly. The count of proprietorships has been increasing faster than the population for several decades, driving up the per capita number. In 1957 there were 4.6 sole proprietors per 100 Americans; in 2010 there were 7.5.

In 2010, revenues from sole proprietorships were very similar to what they were in 1957 – down only 5.3 percent in inflation-adjusted terms. Relatively constant revenues are being spread across more and more businesses, it appears.

The increase in the per capita number of sole proprietorships – and the corresponding decline in the revenues of each – is troubling because of what this decline is correlated with: a drop in new employer firm formation.

Between 1977 (when employer firm formation figures are first available) and 2010 (when the latest recent sole proprietorship numbers can be found), the new business creation rate and the average revenues of a sole proprietorship correlate 0.75 – a correlation of 1.00 means that two numbers move in perfect concert. As the revenue of the average sole proprietorship has trended downward so too has the per capita rate of new employer business creation.

While correlation does not imply causation, the sizable decline in both measures should prompt policy makers to ask what’s going on. From 1977 to 2010, the per capita rate of new employer firm formation declined by 50 percent and real revenues at the average sole proprietorship dropped by 58 percent.

Other forms of business don’t appear to be making up for the decline in the average revenues of sole proprietorships. A similar decline appears to be present with corporations. Between 1977 and 2009 – the latest year for which data on corporations are available – the number of corporations increased by 159 percent. Over the same period, the inflation-adjusted revenue of the average corporation dropped by 36 percent.

While much more detailed investigation would be necessary before drawing any firm conclusions, the data suggests that rapid growth in the number sole proprietorships over the past 50 years might not be as beneficial as it appears at first glance.

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