Smallest businesses comprise 90% of R.I. firms. So why isn’t the state tracking them? • Rhode Island Current

Rhode Island’s smallest businesses are the backbone of its economy, according to a new report by the Economic Progress Institute. But you wouldn’t know it just by looking at the Rhode Island Department of State business database.

More than 90% of 100,000 state businesses in 2020 were micro businesses, defined as those with 10 or fewer employees. But small business owners who run their firms as sole proprietors aren’t required to register with the state, leaving them left out of state data and often, incentive and aid programs too.

A 2016 law would have helped fill in the blanks, setting up a state coordinator to catalog and submit annual reports to the Legislature on the number of micro businesses in the state. But no action has been taken since the bill’s passage, and without funding to hire the staffing needed to conduct the inventory, Gov. Dan McKee proposed repealing the law as part of the fiscal 2025 budget. State lawmakers agreed.

That makes the new report measuring the breadth and experiences of the small business community from 2018 to 2021, all the more important.

“Our interest in part is showing that many business owners are not this typical millionaire-type,” said Alan Krinsky, director of research and policy at the Economic Progress Institute. “We think that gets missed both in public imagination and in what goes on at the State House.”

Rather than million-dollar profits, one-person business owners saw median earnings of just over $53,000 in 2020, or even less, $32,000, for unincorporated businesses. Yet many state incentive and aid programs such as those through Rhode Island Commerce Corporation or the state Minority Business Enterprise program are focused on firms with larger operations and deeper pockets, leaving the most prevalent — and poorest — business owners out to dry.

Taking care of caregivers

The seemingly unequal system is even more skewed when considering the types of small businesses that employ the most workers. The 2,200 small businesses in the “care” industry in 2021, which includes health care and child care, were responsible for more than 83,000 employees — the largest of any industry, according to the report. Yet state contracting opportunities and tax credit programs tend to concentrate on construction, engineering, life sciences and ocean economy-related firms.

“That’s something that needs more attention,” Krinsky said. “We recognize the value of the blue economy, investing in things like that. But we can’t do that at the expense of ignoring where people actually work. The care economy is likely to only grow.”

Krinsky praised lawmakers for allotting money in the fiscal 2025 state budget to subsidize child care for child care workers, extending a program which began as a pilot the prior year. However, he called for redistributing state money from other programs, like some of the annual Commerce tax credits already shown in state analysis to not break even, to help small and micro businesses in growing industries.

Especially for minority and veteran business owners, who comprise a majority of the state’s microbusiness community and were disproportionately hurt by the pandemic. Immediately before the pandemic, Black and Hispanic-owned businesses blossomed, nearly doubling their numbers in the two years prior to the onset of the COVID-19. However, the first year of the pandemic hit hard, causing drops of 35% and 26.5%, respectively, in the number of Black and Hispanic-owned small businesses, according to the report. By contrast, white-owned small businesses grew 2.7% from 2020 to 2021, reflecting their ease in securing federal pandemic aid through the Paycheck Protection Program, the report stated.

While federal data measuring business ownership by race and ethnicity in subsequent years is not yet available, reporting through the Rhode Island Office of Diversity, Equity and Inclusion shows signs of improvement in state contracts awarded to women and minority-owned businesses in recent years. The $30 million in state contracts awarded to women and minority-owned businesses in fiscal 2022 represents 13.2% of its annual contract dollars, nearly double the 7.8% of contract dollars awarded to minority and women-owned businesses the year prior. Until last year, state law required that at least 10% of annual contracts go to minority and women-owned businesses, though the state failed to hit that requirement for most of its nearly 40-year history. In 2023, lawmakers agreed to raise the minimum target from 10% to 15%.

The embattled program has faced ongoing criticism from business advocates and owners who decry a lack of reporting and mountain of red tape preventing eligible businesses from achieving the certification required to bid on state projects.

A $500,000 allotment in the state’s fiscal 2025 budget will pay for an updated study measuring the disparities between the state’s minority business landscape and the contracts it awards to minority-owned businesses.

However, the program offers a narrow window into the state of the minority business community, since certain types of businesses, due to their industry, or size, are inherently ineligible for state contracting work, Krinsky said. He stressed the need for more holistic data of the state’s small, minority business community outside of state contracts to better understand its scope and barriers.

The Economic Progress Institute has no immediate plans to release another report measuring small and micro businesses when new data is available, but Krinsky said he plans to keep tabs anyway.

Meanwhile, the Rhode Island Department of State’s Business Services Division is preparing to roll out a new and improved version of its online business assistance portal, helping new and aspiring business owners register and grow their businesses. The update will include new features like information on how to find mentorship, financial and technical assistance, and is expected sometime “in the coming months,” Faith Chybowski, a spokesperson for the Secretary of State, said in an email on Monday. 

The report was funded with help from Blue Cross & Blue Shield of Rhode Island and United Way of Rhode Island. Funding amounts for each were not immediately available.