Impact of Government Regulations on Small Business

Small businesses are considered the backbone of the community, economic growth and prosperity. Despite this, they also face obstacles and challenges in compliance with regulations.

Small businesses are considered the backbone of the community, economic growth and prosperity. Despite this, they also face obstacles and challenges in compliance with regulations.

By Cleveland SCORE

It is estimated that there are roughly 33 million small businesses across America employing 61+ million workers. Most of these businesses are either single employee/owner operated or have from 1-19 employees. In Ohio, small business employs over 2 million workers with approximately just over half being employed within the following:

  • Health care & social assistance
  • Manufacturing
  • Accommodations & food service
  • Retail & Wholesale
  • Construction

Regardless of the size or industry, there are federal and possibly state regulations that business must follow. To understand the impact of regulations let’s first explore some of the more common ones that may impact small businesses. (This list is not meant to be exhaustive therefore each business needs to perform the appropriate due diligence to identify specific regulations related to their business and industry.)

>> RELATED: Strategies to increase cash flow

Those with the greatest impact on small business are:

  • Federal Tax Codes: Tax codes have differing regulations and requirements depending on the size of business. For small business owners this represents a burden in time and resources identifying and understanding specific impacts on their business.
  • Requirements on Gender, Ethnicity & Pay: This applies to business with 100+ employees. Data is required to be reported to Equal Opportunity Employment. This requires a monitoring and reporting component that may be timely. Also, it can create obstacles for businesses where, in some cases there may be legitimate reasons for pay disparities.
  • Truth in Advertising: This makes it illegal to have false or misleading claims in your ads and marketing materials. Businesses need to ensure that statements made can be backed up with sound documentation in the event they are challenged.
  • Fair Packaging & Labeling Act: If your business sells food or other packaged goods, you are required to provide information on all ingredients as well as information on the product, packaging location and distribution. 
  • FDA Regulations: This applies to businesses that sell food across state lines. The business is required to register as a facility and face inspections by the FDA.
  • State & Local Inspections: This applies to home businesses that provide food within the state in which they exist. These owners will be required to meet any state and local requirements and are subject to inspections.
  • USDA Regulations: This applies to agricultural businesses. The regulations are based on food products manufactured and sold. USDA regulations commonly require inspections no matter what food product the business offers.
  • Minimum Wage: This is associated with all businesses and can be different depending on state requirements. The federal minimum wage is currently $7.25/hour, however there are individual states where the minimum wage exceeds this amount. 
  • Identity Theft Regulations: In cases where businesses collect financial or personnel client information, they have a liability related to ensuring the information does not get stolen or/and used in conjunction with identity schemes.
  • State Licensing Requirements: Each state has unique licensing requirements and in the event your business operates across state lines there may be more than one set of requirements. To continually monitor and ensure the appropriate licensing is in place requires time and may involve licensing fees.

Others that may be less common:

  • Affordable Care Act: Small businesses with 50+ employees are required to have health insurance coverage for employees or face penalties. These policies often have high premiums.   Business owners weigh the cost of premiums versus the cost of penalties, however, both options increase expenses and cut profitability. 
  • Government Contractor Pay: This applies to any business that does work at the government level. It requires a minimum hourly wage rate to be paid for workers performing government contract work.
  • Mandatory Sick Pay: Again, this applies to businesses performing government contractor work.  It requires companies to provide up to 8 days of sick leave per year.
  • Independent Contractor Rules: When a business opts to utilize contract workers the business may be required to ensure the contract workers have the same requirements as traditional employees. 
  • Safety & Health Act: This ensures employers provide a safe and clean environment for workers.  Depending on your business you may be required to undergo frequent inspections and have other time-consuming processes to complete.

In summary, business regulations fall into eight general categories: taxes, employment, labor, antitrust, advertising, environmental, privacy and licensing. Individual businesses may not have all categories of regulations depending on the type of operation, product and locations serviced, however, they still have a fair number of them to be monitored, identified, and implemented. As such impacts can be costly in both hard dollars and resources. Costs associated with regulations impact the fixed costs of the organization as they add additional hours of work and the potential need for compliance officers.

It should be noted that there is a correlation between the number of regulations impacting an industry and the effect on industry based on size. Large corporations can absorb the cost burden associated with increasing regulations by adding resources.  Small businesses, however, have limited resources and thus are not always able to comply easily with regulatory requirements. Many may end up closing their doors thus reducing not only the number of small businesses but also translating into area job losses. It has been verified that increases in regulations assist in growing medium to large businesses.

>> RELATED: Understanding the benefits and risks of outsourcing

Despite the adverse impact regulations may have on your business there are some steps small business owners can take to mitigate these. These steps include:

  • Adequate knowledge of regulations and periodic review to determine how and if they apply to your business. This can be supported by any industry organizations or publications that may have information on regulations that impact the industry.
  • When implementing new policies that are required by regulations use the trial-and-error method of implementation. Use a pilot to refine the process so that it complies and is efficient. 
  • Stay up to date with regulatory additions, deletions, and changes. This will allow you to review and revise related processes.

Keep in mind that regulations, while having adverse impacts, are in place to protect employees and clients. The significance of the dual nature should not be minimized, however, optimal use of technology and efficient procedures on businesses part can reduce the cost impacts. A good example of this was the initial implementation of the Sarbanes-Oxley regulation related to financial controls. Many large organizations spent several million dollars implementing controls and systems to meet requirements. This had major impacts on processing time and salary costs. After the initial implementation period, however, there was a period of revision in the process to make it more efficient as companies realized the over-kill that had been applied.

In the event your business may have a unique need for outside assistance with operational issues, growth initiatives or other business matters, SCORE mentors can offer you expertise and support. Mentors with a wide range of technical and user experience are available on request.

The Cleveland Chapter of SCORE was founded in 1965 to foster and support the small business community in Northeast Ohio through mentoring and education. There are currently 80 volunteers with experience in the fields of business ownership, managers, accountants, attorneys, and other business fields that are ready to share their knowledge through mentoring. For more information about our services for small business visit the website at or call (216) 503-8160. 

In addition to mentoring services, there are also webinars and on-demand classes listed on the website.   To attend a webinar, visit the site and register. The following are upcoming events in March:

              Seminar Title                                                                                           Date & Time

Starting a Group Home in Ohio                                                                          03/09/2023 – 7:00 PM

Simple Steps Marketing Plans                                                                            03/13/2023 – 7:00 PM

How to do Business Research with CPL                                                            03/15/2023 – 12:00PM

Women in Leadership 2023 – Journey to the Top                                          03/15/2023 – 1:00 PM

Podcasting for Business                                                                                   03/16/2023 – 11:30 AM

How to Improve your Business Website to Turn Visitors into Sales              03/16/2023 – 1:00 PM

Reaching Customers Online with Search Engine Optimization (SEO)              03/20/3023 – 7:00 PM

Simple Steps – Financial Projections                                                                 03/20/2023 – 7:00 PM

Bookkeeping Basics for Small Business Owners                                              03/21/2023 – 1:00 PM

How to Use a Virtual Assistant                                                                           03/22/2023 – 12:00 PM

Recipe to Revenue – How to Start a Successful Food Business                    03/23/2023 – 1:00 PM

Starting a Specific Franchise                                                                            03/23/2023 – 7:00 PM

Business 201                                                                                                   03/27/2023 – 4:00 PM

Simple Steps – Funding                                                                                  03/27/2023 – 7:00 PM

Sell Online with E-Commerce tools                                                                   03/30/2023 – 7:00 PM


On Key

Related Posts

A Low-Cost, Easy Way to Retain Employees: Have Fun!

Social connection is essential to the human experience – we need it in our professional lives as much as we need it in our personal lives. Here are some tips for bringing fun into the workplace to create an enjoyable environment and improve employee retention.

public speaking: overcoming the fear factor

We all experience Presentation Anxiety from time to time. But instead of fleeing the scene, it’s better to find a way to handle and overcome your fear of public speaking. Check out these five tips to managing Presentation Anxiety.

Small Businesses can compete with large companies

You might think that a smaller business with a smaller staff and budget can’t keep up with large companies. However, there are several ways that a small business like yours can reach, appeal to, satisfy, and keep consumers coming back for more.