Kauffman Firm Survey: Fifth Follow-Up

Abstract

The stability of the American economy depends on the spirit of entrepreneurship that drives the creation of new businesses, jobs, and innovations. Yet launching and running a business can involve many challenges, and many efforts fail in their early years. These barriers to success threaten our nation's long term prosperity in an increasingly competitive global economy. A new study aims to help new business owners overcome start-up challenges and build innovative, growing companies.

The Ewing Marion Kauffman Foundation of Kansas City is sponsoring this research to gain a better understanding of how firms grow, strengthen, and mature. Mathematica is conducting a study of new businesses to help the Foundation in its efforts to promote new business development.

The Kauffman Firm Survey (KFS) is the largest longitudinal study of new businesses ever embarked upon. The panel of businesses was created by using a random sample from Dun & Bradstreet’s (D&B) database list of new businesses started in 2004, which totaled roughly two hundred fifty-thousand such businesses. The KFS oversampled these businesses based on the intensity of research and development employment in the businesses’ primary industries. The KFS sought to create a panel that included new businesses founded by a person or team of people, purchases of existing businesses by a new ownership team, and purchases of franchises.

To this end, the KFS excluded D&B records for businesses that were wholly owned subsidiaries of existing businesses, businesses inherited from someone else, and not-for-profit organizations. Also, previous research on new businesses has reported variability in how business founders perceive when their businesses started operations. Therefore, a series of questions were asked of business owners about indicators of business activity and whether these were conducted for the first time in the reference year (2004).

These indicators included: Payment of state unemployment (UI) taxes, Payment of Federal Insurance Contributions Act (FICA) taxes, Presence of a legal status for the business, Use of an Employer Identification Number (EIN), Use of Schedule C to report business income on a personal tax return.

To be “eligible” for the KFS, at least one of these activities had to have been performed in 2004 and none performed in a prior year. Businesses were excluded if they had an EIN, schedule C income, a legal form, or paid state UI or FICA taxes prior to 2004.