We model the process of starting a business from the entrepreneur’s perspective. The realities entrepreneurs experience on the ground are often quite different from the process as explained in city code or on an agency’s website. In addition to researching cities’ on-paper processes, we also spoke to entrepreneurs, city officials, and advocates on the ground to gain important feedback.
We analyze local rules and processes for a representative sample of business types. As so many rules are triggered by specific business types (like a food business) or situations (like changing the existing zoning use of a building), it is important to consider how local regulations affect particular businesses.
We provide informative points of comparison between the cities by calculating the cost and number of steps to start businesses. This approach compares cities without sacrificing specificity—a problem inherent in systems that rank or grade cities.
To select which cities to survey, we organized the nation’s most populous cities into regional groups. We then dropped from the list all cities with populations below 300,000, except those that are the largest city in their state. We also used a random number generator to randomly select just two cities each from California and Texas to ensure those states did not dominate the pool of cities. This resulted in a list of 53 geographically diverse, large to mid-sized cities.
We then narrowed down the list to a final selection of 20 cities based on several factors, including:
Population and geographic diversity: We wanted the sample to include cities with both mid-sized and large populations, as well as cities from different regions of the country.
Feasibility of research: We wanted to ensure that there was enough information available on the process to start a business in each of our selected cities to allow us to map out start-up procedures consistently across the cities. For example, though it was originally chosen as one of the 20 cities, we were unable to study Cleveland due to how comparatively difficult it was to find even basic information online about starting a business there.
Opportunities for grassroots advocacy: We wanted to invest in cities where we would be able to engage with entrepreneurs long-term and use our findings to help create needed and desired change.
The report looks at two groups of metrics for each city: how that city regulates new businesses generally, and the specific hurdles entrepreneurs face when completing the steps and paperwork to start their businesses.
General Barriers to Starting a Business
For aspiring business owners, the actual procedures required to start a business—filing an application, registering for taxes, passing an inspection—are not the only aspect of a city’s regulatory environment that affects the experience of getting up and running. Many entrepreneurs have difficulty even knowing what those procedures are or in what order to complete them, as many cities do a poor job of communicating requirements. Entrepreneurs we spoke to tend to be eager to comply with their cities’ rules and regulations for starting a business but often do not even know where to start because cities fail to help them navigate the process.
Meanwhile, certain regulations—such as the number of business license categories on the books or restrictions in the city’s code that keep an entrepreneur from being able to go into business in the first place—erect additional barriers to business. When a city licenses hundreds of distinct business activities, applicants must struggle through lists and statutes to determine which licenses apply to their business. And when a particular entrepreneur is prevented from applying for a permit—because they have an unrelated criminal record, for example—that person is unable to even get to a point where they can proceed through the legal procedures for starting up.
This report accounts for these barriers by measuring a group of metrics that consists of hurdles typically codified in city code or mentioned on government agency websites. Rather than actual steps an entrepreneur has to complete to get up and running, these metrics describe a city’s overall regulatory environment—the characteristics of how a city regulates small businesses, capturing rules that may not add extra hoops to the start-up process but still can make things difficult.
These metrics include:
Licensing designation: Does a city license all businesses or just certain types? A business license is a government permission slip to do business, but not all cities license businesses in the same way: While some license by activity—meaning that a retail store applies for a specific retail business license, a restaurant for a food business license, and so on—others have what they call a tax certificate, which is a general form all businesses must pay to file before they open to the public. For each city, we note how officials license businesses—whether by activity or by tax—and if the city has a general business license requirement.
Business license count: How many categories of business activities does a city require to be licensed? For cities that license businesses by activity, they typically have a list of which business types need to get a license before opening day—each type with its own application. Cities with tax certificates, meanwhile, have one application, but usually charge businesses a “tax rate” that changes depending on the type or classification of business. For each city, we note how many license categories or tax classifications there are for entrepreneurs to navigate.
One-stop shop analysis: How effectively does a city organize and present information on its website related to the regulatory process of starting a business? An online one-stop shop is a website that allows entrepreneurs to complete all or most of their paperwork in one place; these sites often promise single log-ins and a centralized online portal so entrepreneurs do not have to contact the various agencies separately and get lost in an inter-agency labyrinth. Entrepreneurs’ experiences navigating red tape are often made or broken by how well or how poorly city officials explain the process of starting up—and how well entrepreneurs can access that information in a single, centralized location. Being able to complete all or most regulatory requirements on the same website or through the same portal—as well as to read through a clear, thorough step-by-step guide on how to apply for licenses and permits—saves time and headaches and reduces unnecessary confusion. To judge how well cities’ websites offer a one-stop shop and communicate requirements to applicants, we score each city against five criteria, each of which is a fundamental part of having a true one-stop shop online for starting a business and completing paperwork:
Does the website connect city requirements with processes from other levels of government, such as corporate registration?
Can an entrepreneur complete most forms and registrations for the city through a single online portal, rather than in person or through each agency’s own website?
Does the website provide sufficient information on all requirements for starting a business, such as zoning and permits, not just for getting a business license?
Does the website have a user-friendly, single log-in opportunity so entrepreneurs can organize information and track progress in one location?
Does the website guide entrepreneurs through the process effectively with helpful, step-by-step guides?
Notable roadblocks: What kinds of government-imposed regulatory roadblocks keep entrepreneurs from starting a business altogether or make it especially difficult for them to stay up and running? Certain rules—often baked into obscure provisions of city code—erect hurdles for small businesses, in some cases discouraging certain residents from trying to start a business or even making it impossible to start up altogether. We reviewed city codes and websites to look for these kinds of regulations, noting when a city has inflexible fee schedules, protectionist rules that target certain kinds of businesses, or procedures that make things difficult for returning citizens or lower-income entrepreneurs.
Accommodations for new or small businesses: Are there things the city does to ease requirements on entrepreneurs or to give them flexibility? On the bright side, cities sometimes enact rules designed to ease burdens on businesses that are smaller-scale or just getting up and running. We reviewed city codes and websites to look for best practices on how cities can accommodate small businesses, noting when a city ties licensing costs to a business’ revenue, has flexible licensing terms, or creatively reduces the steps or paperwork it takes to start up.
Procedures for Starting a Business
The second group of metrics consists of numbers we derive by totaling the steps and procedures an entrepreneur must complete in each city to start a business.
Throughout our research, we found that the regulatory process depends greatly on what type of business an entrepreneur is trying to start: A street vendor does not need a building permit, while a beauty salon is not licensed in the same way as a coffee shop. Many studies compare the steps it takes to start a business in cities by counting all the processes that apply to every business. This approach inevitably misses complex rules that vary from one situation to another, even though those situational rules, such as zoning approvals and construction-permit requirements, often present the biggest hurdles to entrepreneurs.
We compare the steps it takes in each city to start five specific, common business types. We create hypotheticals to run through each city’s licensing process, allowing us to model the effect of small-business regulations in a realistic way. This method not only uncovers the sheer complexity of local licensing and permitting schemes, but also allows us to more accurately identify the kinds of legal barriers entrepreneurs face at the local level.
Our Five Business Types
These five business types trigger distinct sets of regulations:
A restaurant, which sheds light on how cities regulate food and permit food establishments. In our hypothetical, two friends want to open a small pizzeria together and to do so need to perform significant renovations on an existing space that had previously been occupied by a restaurant that went out of business. We assume the business is a limited liability company and also that they spend $180,000 on renovation costs for a 1,000 square-foot space and have 40 seats with eight employees. These estimations are based on industry standards for calculating the seating capacity of a restaurant 1
as well as for valuing renovation projects on a per-square-foot basis. 2
A retail bookstore, which sheds light on how cities regulate general retail and also how zoning can affect the start-up process at the local level. 3
In our hypothetical, an entrepreneur wants to open a retail bookstore in an area of town where the city requires a conditional zoning approval, rather than approving the zoning by right. (“By right” means that if a project complies with zoning standards, it is approved without any discretionary review.) We assume the business is a limited liability company, that there are no renovation costs associated with the commercial space, and that the store will be 1,000 square feet with two employees.
A food truck, which sheds light on how mobile businesses may be treated differently from brick-and-mortars. In our hypothetical, a single operator wishes to start her own food truck selling street foods that she learned to prepare growing up. She plans to operate in commercial corridors, preferably at a downtown location on public, not private, property. We assume the business is a limited liability company, with just one truck and no employees.
A barbershop, which sheds light on how state occupational licensing and permitting place even more regulatory burdens on entrepreneurs. In our hypothetical, a barber wants to open a new barbershop in a commercial zone, where his business would be permitted by right but where he would need to complete significant renovations on an existing space that had previously been a salon. We assume the business is a limited liability company, and $75,000 is spent on renovation costs for a 1,000 square-foot space to house a new barbershop with six employees. These estimations are based on industry standards for valuing renovation projects on a per-square-foot basis. 4
A home-based tutoring business, which sheds light on rules for businesses that are run out of the home. In our hypothetical, a retired music teacher plans to tutor piano students from the living room of the home she owns. We assume the business is a sole proprietorship with no employees and that the teacher plans to invite students into her home for in-person lessons.
We total the following metrics for each of the business types listed above:
Total cost: How much does it cost to get the business through required procedures for starting up? We calculated this metric by totaling the fees for all the licenses, permits, and registrations each business needs to get started. In cases where fees are dependent on the size or circumstances of the business, we made reasonable assumptions—that the barbershop would spend $75,000 on renovations, for example, which informs how much the corresponding building permit would cost.
Number of fees: Do cities nickel and dime applicants throughout the process of starting up? We calculated this metric by counting how many fees governments impose on each business for completing registrations and paperwork.
Minimum in-person activities: How much time is lost to making in-person trips to complete requirements? We calculated this metric by counting the number of compliance activities each entrepreneur needs to complete in person, rather than online or by mail. Typically this meant having to make in-person trips to agency offices to file paperwork, but we also counted things like inspections, mandatory meetings, and getting paperwork notarized.
Number of agencies involved: How often do entrepreneurs get bounced between agencies while complying with different sets of rules? We calculated this metric by totaling the number of agencies entrepreneurs must work with in order to get up and running—whether in the form of submitting paperwork to an agency’s staff, or in terms of abiding by regulations that an agency has promulgated.
Number of forms: How much time is lost to filling out paperwork and other kinds of registrations? We calculated this metric by counting the various forms and applications each business needs to submit. For the supporting documentation an applicant must include along with a license or permit form, we counted some as separate forms and some as merely extra steps, depending on the documentation in question (see Appendix A for details).
Number of steps: How complex is the start-up process overall? We calculated this metric by totaling the discrete tasks an entrepreneur must complete to start each of the business types. Tasks we counted as steps include but are not limited to: filing a form or application, submitting supporting documentation, scheduling and attending meetings and inspections, and completing ancillary requirements like training or zoning checks.
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