Starting a business not as risky as people say

Check out this article from Jason Cohen: Starting a business isn’t as crazy and risky as they say. According to Cohen, popular ideas about failure rates for start-ups are based on misleading analysis of data. Statistics about business failures are muddled by two fundamental questions: (1) What is a business? and (2) What is a failure?

What is a business? There’s a big difference between a side business (a hobby or a casual source of extra income) and a primary business (main source of income) and yet statistics often lump these two together. Presumably failures are more common among side business, inflating the sense of how often serious businesses fail.

What is a failure? Common ideas about the frequency of failures are based on figures that simply track when a business goes out of existence. But a company can disappear for numerous reasons that are not failures. Maybe the company got bought out to the delight of the owner. Maybe the owner grew tired of the business and wanted to do something else. Maybe the owner retired. The figures are more encouraging when you sort out genuine failures from businesses that folded agreeably.

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3 thoughts on “Starting a business not as risky as people say

  1. Interesting — I’ve also wondered about the “IRS effect” on business statistics in the US.

    For example, I know a lot of knifemakers, some full-time professionals, others part-time hobbyists. Most of them sell knives for a number of reasons, but for hobbyists one of the reasons is to recover the cost of materials and equipment. However, if the knifemaking enterprise (or should I say endeavour) is officially a hobby, the money coming in is all taxable AFAIK, and legally you can’t subtract the costs to only pay tax on the net profit (if any) unless it is officially a business, or more precisely a business according to the IRS. I also know a dog breeder who says the same is true for dog breeding — even though he basically breaks even, if he didn’t qualify as a business he’d have to pay taxes on the “income”.

    So I imagine there are lots of small businesses set up primarily or solely so that costs can be used to offset income to reduce taxes.

    If so, then many of these businesses are probably not even particularly concerned about making a profit at all, and in that sense are much less serious than even side businesses started with the intention of making at least some income. Being less serious presumably the pricipals would be less concerned about failure, but also more inclined to continue despite bleak prospects.

    And then there is the matter of qualifying as a business in the eyes of the IRS. From what I’ve heard, that boils down to making a profit at least one out of every few years (I’ve heard it is one year in four). In that case, there would be considerable incentive to report a profitable year occasionally regardless of the actual state of the business. Or perhaps alternatively, to start and fold a succession of businesses which never show a profit.

    All in all, the statistics gathered based on these pseudo-hobby businesses probably don’t correlate with reality very well. And I imagine they are a significant proportion of many groups of small businesses.

    I wonder if that accounts partly for what I’ve heard about restaurants as businesses, that there is an extremely high failure rate and few show a profit in the first three years. These days it seems that “chef” or “restauranteur” is what a lot of middle-aged professionals want to be when they grow up.

  2. Oh and about starting businesses not being as risky as they say … I’m sure the internet has lowered the bar for funds required to start many kinds of businesses, thereby lowering the entreprenuerial risk.

  3. My dad started a business that was also a hobby for him. I dont mean to say hobby as in, “he enjoyed the business”… or that the business was a pleasure to him… but rather what I mean is that it was always entirely a hobby for him from the beginning, but being able to do it “legally” necessitated that it be a business. What he did involved a certain degree of interactivity with local society. He was under legal obligation to be listed as a business and to get a business license, but it was never about making profit for him – he just wanted to “do what he enjoyed doing,” even if for free or at a minor loss.

    The unfortunate thing is that the state revoked his business license and ordered him to quit doing what he wanted to do… and why? Because his taxable profits werent high enough for the state to “let him” continue.

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