New legislation aimed at reforming the bankruptcy system will
eliminate a much-needed safety net for America's small
businesses, casting a pall over not only aspiring entrepreneurs but
established businesses as well, experts say.
"It will chill the formation of startup businesses,"
predicts Robert Lawless, a law professor at the William S. Boyd
School of Law at the University of Nevada, Las Vegas. "It
would have the same effect on businesses taking on new investment
risk. It's going to dampen the enthusiasm both to start new
businesses and expand existing ones."
Lawless co-authored a recent study that examines the impact of
bankruptcy reform on small business. Chief among its findings: The
U.S. government has grossly underestimated the number of
entrepreneurs affected by the bankruptcy reforms. According to the
study, which was funded by the Ewing Marion Kauffman Foundation in Kansas
City, Missouri, small-business owners file an estimated 260,000 to
315,000 bankruptcies annually, which is nine times higher than the
government's official tally.
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What's more, the study found, government statistics report
that business bankruptcies have declined steadily since the
mid-1980s--when businesses comprised about 18 percent of all
bankruptcy filings--to their present-day total of only 2 percent.
That is in stark contrast to annual statistics compiled by D&B
and the SBA, which reveal a significant increase in small-business
failures during the same period.
The government's statistics, the study maintains, reflect
efforts in the mid-1980s to simplify the bankruptcy reporting
process as well as the use of new computer software, which changed
the way attorneys completed forms used to compile the government
statistics. Consequently, many entrepreneurs who declare bankruptcy
are now classified as consumers cases rather than business
cases.
Entrepreneurship advocate Bob Litan, vice president of research
and policy at the Ewing Marion Kauffman Foundation, is concerned
about the long-term effect of bankruptcy reforms on business
development in the United States. Litan notes there is evidence
that
in countries with weak bankruptcy protections, entrepreneurial
activity is adversely affected: "It's something that's
in the back of people's minds: If you take away the system, you
[can] lose everything--your house, your car, your
furniture."
By the same token, some existing business owners will likely
pass up growth opportunities in an effort to minimize financial
risk. "I think that as it dawns on people already in business
that it's going to be tougher to get bankruptcy protection,
they may be more risk-averse," Litan explains. While
entrepreneurs--and aspiring entrepreneurs--should carefully
evaluate risks before making business decisions, "[taking
risks] is the only way some businesses can grow."
Standing Your Ground
In June, the Supreme Court upheld cities' right to use eminent
domain, or condemnation, to give land to large businesses to
bolster economic development. (In the past, eminent domain was
typically reserved for public uses, such as building roads.) Since
bigger companies can deliver more tax revenue to cities, the ruling
will make it more difficult for small landholders to fight eminent
domain in state courts.
Still, entrepreneurs have some recourse. The Senate and the
House of Representatives are considering limiting the use of
eminent domain to benefit big business; state legislatures have
taken up the issue; and small landholders, via an organization
called the Castle Coalition, have organized protests denouncing the
ruling. Eminent domain opponents are even getting creative: One
group is trying to condemn Supreme Court Justice David Souter's
property.