In 2010, there were about 2.5 million new business applications. In 2020, this number almost doubled to 4.35 million applications submitted. This is also an almost 25 percent increase from 2019 and the largest single year increase in the past decade. This article will discuss the recent increase in new organizations and the issues new employers should consider when founding a startup.
Between March and May of 2020, at the start of the Coronavirus Pandemic, over 23 million people in the United State lost their jobs as a result of economic closures nationwide. Unemployment hit a historic high in April at 14.7%. These staggering unemployment numbers led to one of the largest spikes in startup foundings. In 2020’s record breaking third quarter, from June to September, almost 1.4 million startups were founded, an almost 50% increase from the previous quarter, and a 67% increase from the previous third quarter record, set in 2018. New business applications slowed in the fourth quarter with just over 1.1 million. However, it rose again in the first quarter of 2021 to 1.36 million, suggesting that the startup spike is still going strong.
Triggering the Spike
Many Americans were inspired to start their own businesses due to an increase in personal savings rates, changes in consumer behavior and encouraged spending to revive the struggling economy. Prior to the pandemic, industries such as comfort wear & athleisure, food delivery, and health & wellness were already thriving and saw even more growth as non-essential businesses closed. After the permanent closure of many businesses, many individuals were left unemployed and took this opportunity to start their own organizations. Many of these new businesses filled the gaps left by millions of closures and catered to the consumer’s preference for online shopping and services.
Several offices were shifting to virtual even before the pandemic and many may remain this way for the foreseeable future in certain industries. The shift to “work from home” and online only businesses also played a huge part in startup growth as employers could eliminate the cost of leasing physical spaces and paying those associated costs. It made it possible for individuals to work from the comfort of their own homes, making it that much easier to start a business.
Ease of Founding a Startup in the United States
In 2020, the number of new businesses increased the most in economies where the procedure for starting a business is the easiest. Countries where the process to start a business is faster have had a higher likelihood of experiencing a spike in business formation during the pandemic. There is even correlation between the average number of days it takes to complete the administrative process of starting a business and the increase in startups.
The United States already has a relatively high rating for the ease of starting a business, receiving a score of 91.6 out of 100 from the World Bank. Additionally, COVID-19 economic recovery has focused mainly on assisting businesses and saving jobs, thus promoting the growth and sustainability of these new businesses. The U.S. Small Business Administration has a Paycheck Protection Program (“PPP”) which aids small businesses, including eligible startups, by giving loans to so employers can protect their workforce. If certain conditions are met, these loans can even be forgiven. By August of 2020, 3.3 million PPP loans were approved for amounts under $50,000.
Employment Law Issues for New Businesses
Organization founders need to be mindful of the many employment law issues that need to be complied with as they roll out their new startups. We often supply “boot camp” advice to startups, providing HR-compliance materials and guidance. Our top 10 employment law issues include:
- Compliance with Laws: New employers will have to comply with federal, state, and local laws. Employers should be aware of these different jurisdictions and confirm that they are complying with each. They should also be aware that certain regulations are based on the number of employees and as their business grows, they may have to change their policies.
- Offer Letters: In businesses, agreements can take many forms. For example, at the start of the business it may be important to enter into a founder’s agreement to ensure that all founders are on the same page. Written agreements with employees are also very significant. Oral agreements can often lead to misunderstandings and leave the employer in a vulnerable position. Putting agreements in writing prevent disagreements that may lead to legal conflicts. When hiring a new employee, it is encouraged to use a carefully drafted offer letter, that the employee can review before signing. We often prepare standard form contracts that can be tailored to the specific offer.
- Customer & Vendor Agreements: If dealing with customers and vendors, it may also be wise to keep those agreements in writing as well, to avoid any miscommunications.
- Business Classification: One of the first decisions a startup makes is the legal form of the business. Higher taxes and significant liabilities can be avoided by structuring the business properly, whether it be a not-for-profit, corporation or a limited liability company. New business owners should be diligent in order to avoid their startups being held liable for unintended and unanticipated taxes, fines, and penalties.
- Employee Classification: Another important tax issue is correctly designating whether individuals providing services to the business are considered employees or independent contractors. Many startups classify workers as independent contractors in order to avoid paying for government programs such as Social Security, Medicare taxes, and unemployment taxes, and to avoid providing health insurance coverage. However, if the employer demonstrates a significant level of control over the worker and the worker performs the employer’s core business, the IRS or the state may claim that the worker should be classified as an employee. If an employer intends to hire somebody as an independent contractor, they must be certain that they do not treat them as an employee unless they want to be liable for their actions and intend on providing them with the benefits and protections required by law.
- Employee Onboarding: Upon hiring, employees must receive an IRS Form W-2 and independent contractors must receive IRS Form 1099 by February 1 of each year. Employees should also receive a series of other forms, including offer letters, rate of pay disclosures, anti-harassment and discrimination policies, as well as others, depending on location. As stated above, it is important to draft agreements and contracts for formalizing the employment of permanent and temporary workers, and independent contractors. These agreements should contain the terms and conditions of employment, the individual’s responsibilities, and the compensation being paid to the worker.
- Employee Handbook: Another significant document startups may want to consider is an employee handbook. An employee handbook can contain several sections that outline things like the organization’s policy on leave, if and what employee benefits are provided, information on their healthcare plan, etc. This also gives employees the ability to go back to look over policies at a later date.
- Protective Agreements: Startups may be interested in confidentiality and non-compete agreements. Confidentiality agreements protect business strategy, trade secrets, algorithms, client information, and more. Non-compete and non-solicitation agreements ensure the future interests of the organization.
- Giving Employees Feedback: Periodic performance reviews allow for employers to make sure organization business is running smoothly and employees are following policies and protocol. This is also a good way to improve the organizations workforce, morale, and overall performance.
- Record-keeping: Organizations should maintain thorough corporate and employee related documentation. Failure to maintain thorough documentation of performance issues can be troubling for a startup. Keeping clear records of the startup’s activities from the beginning can be extremely beneficial when dealing with employee related issues.
The startup spike as a result of the COVID-19 pandemic came rather an unexpectedly and seems to be continuing well into 2021. As more organizations form and join the national or even global market, there are many aspects of being new employers that require consideration. Becoming aware of what is needed and following through on compliance can help startups avoid future issues and set up their organizations for success.