Sara Hopkins is a real-estate entrepreneur who lives in Des Moines, Iowa, where she was raised. She still frequents the charming neighborhood on the north side of town, Highland Park, where she remembers growing up. Today, Highland Park is a bustling, walkable community, anchored by mom-and-pops that have been in business since Sara was a kid.
In 2020, when looking for a place to house her new real-estate firm, which she had previously been operating out of the Des Moines suburbs, Sara began eyeing a vacant, dilapidated building along one of Highland Park’s busy commercial corridors. Given that the city had targeted the area for increased investment, Sara thought it would be the perfect place to set up shop—and would allow her to give back to a community that has always felt like home to her.
But as Sara moved forward with the project, she quickly realized that her biggest challenge in revitalizing the property would not be opening a new location in tough economic times, but rather obtaining the approvals, permits, and licenses she needed from the city to expand her business. Not only was the regulatory process poorly explained from the start, but city officials also told her that she would need to invest thousands of dollars in preparing site plans and documentation to apply for 13 variances—none of which, after all that time and expense, she was guaranteed to receive.
“It felt like the rules were designed to make it difficult for someone like me to start up,” Sara said. “I had already spent my life savings to make this project a success, and the city was asking me to spend tens of thousands more to open a real estate office in a growing part of town?”
Although Sara eventually received the permits she needed, many entrepreneurs would have been stopped dead in their tracks, unable to come up with the extra time and resources needed to navigate city bureaucracy. As a consequence, many aspiring small business owners like Sara are never able to start the ventures of their dreams.
Small businesses are the backbone of the American economy. They account for 44% of economic activity and generate two-thirds of new jobs in the U.S. 1 The ability to be entrepreneurial and start a small business is central to the American Dream, and all Americans have the right to safely pursue an honest living. These entrepreneurs not only provide for their families, create jobs, and help grow the economy, but also contribute fundamentally to their communities: Now more than ever, people appreciate how vibrant local businesses transform their neighborhoods for the better.
But in cities across the country, burdensome local rules and regulations make it difficult—and sometimes altogether impossible—for entrepreneurs to start a small business. These rules also stymie the success and growth of existing small businesses. 2 These policies—which force aspiring entrepreneurs and small business owners to spend enormous amounts of time and money to navigate complex red tape—deter those with big dreams but little capital from pursuing their goals.
Death by a Thousand Cuts
Unfortunately, stories like Sara’s are familiar to entrepreneurs across the country. The cost, time, and complexity of regulatory hurdles add to the challenge of getting a business off the ground, and people like Sara are often forced to either abandon their plans entirely or operate in the informal economy. 3 This is because the red tape entrepreneurs face at the local level leads to a kind of death by a thousand cuts: Even if no single rule or fee proves insurmountable on its own, the various steps and costs taken together create a painful process that entrepreneurs struggle to navigate.
Starting a business is already a tough proposition—entrepreneurs take considerable risks and often invest large sums of their own money—but this death by a thousand cuts from city and state rules imposes scores of additional burdens that bog down entrepreneurs with high fees, long wait times, and complex paperwork. Meanwhile, the time and money entrepreneurs spend on regulatory compliance are time and money they cannot otherwise spend on getting their business off the ground. These challenges exacerbate applicants’ frustration and often put entrepreneurship out of reach for those who are unable to hire lawyers or expediters to help them through the process.
The 20 Cities Studied
Barriers to Business
To better understand the local regulatory barriers entrepreneurs encounter, this first-of-its-kind study analyzes the rules, regulations, and requirements to start a business in 20 cities across the country. This report identifies and quantifies the regulatory hurdles entrepreneurs experience, while pointing to specific reforms cities can pursue to make it cheaper, faster, and simpler to start a small business. Key findings include:
Starting a business is already an expensive endeavor, but local regulations pile on additional costs.
- For example, entrepreneurs who want to start a restaurant in the 20 cities surveyed must pay, on average, more than $5,300 in fees for permits and licenses.
- To start a barbershop, applicants must pay, on average, 13 different fees to agency officials just to get up and running.
Complying with local rules consumes not just capital, but also an entrepreneur’s valuable time.
- For example, regulations are often opaque, and on average, cities do a poor job of creating comprehensive portals— one-stop shops—that give entrepreneurs reliable step-by-step guides on how to navigate and quickly comply with rules. None of the cities studied meet all five of the one-stop shop criteria measured. Birmingham and Des Moines do not meet any _of the criteria. Eight cities—Boise, Boston, Jacksonville, Phoenix, Raleigh, San Antonio, Seattle, and St. Louis—only meet one or two.
- Home-based businesses that require special zoning approval from government must not only obtain a time-consuming permit—often after enduring a public hearing—but also must interact with, on average, nearly six different agencies before being allowed to open.
Starting a business involves navigating complex bureaucratic processes that are often unrelated to public health and safety.
- For example, to open a barbershop in the 20 cities surveyed, an entrepreneur must complete, on average, 55 steps with eight different government agencies involved in the process. Many of these steps have little to do with sanitation or public safety, but still serve to trap aspiring barbers in a complex maze of rules and restrictions.
- Even though they do not operate out of brick-and- mortar space, applicants for food truck licenses and permits must complete, on average, 35 steps with 11 forms and seven agencies involved in the process.
The report also finds that the specific rules an entrepreneur encounters when starting a business depend greatly on the type of venture they wish to start, as well as the circumstances of the proposed project. This often causes confusion, as inconsistent information and arbitrary enforcement from officials further frustrate entrepreneurs and stall the approvals they need to get up and running.
An Opportunity for Reform
Addressing the challenges entrepreneurs like Sara face every day is an urgent policy issue, particularly as small businesses continue to reel from the devastating economic effects of the COVID-19 pandemic and subsequent shutdowns and government restrictions. Cities continue to seek ways to bolster their economies.
Small business closures reached startling levels during the height of the pandemic. The Federal Reserve estimates that the pandemic triggered 200,000 more business closures during 2020 than normal. 4 And that estimate does not include the 26 million small businesses that do not have any employees—those likely to have the highest failure rates. 5 Furthermore, minority-owned enterprises may have been disproportionately affected: One study found that Black-owned small businesses experienced a 50% decrease in revenue during the pandemic, compared to a 37% decrease for white-owned businesses. 6
But while the pandemic led to alarmingly high rates of small business closures, the number of monthly new business applications is now higher than ever. 7 Cities have a timely opportunity to not only help continue that trend, but also achieve much-needed economic growth and foster small-business creation by making it easier to get started—and they can do so without breaking the bank. Cities should invest in their small-business communities by removing the barriers to entrepreneurship that are already on the books, instead of creating expensive, inefficient workarounds to cryptic rules. By doing so, they will make it cheaper, faster, and simpler to start a business—so that people like Sara can jump at the opportunity to pursue their entrepreneurial dreams.