The Impact Of Government Regulations On Small Business Contractors

government regulation

Slowly but surely, America is now on its way to recovery from the onslaught of the COVID-19 pandemic. Small businesses, who were the most affected by the government-mandated lockdowns and supply chain stagnation, are reopening their doors once again. But another barrier seems to block these small businesses from making a full recovery—government regulations on businesses.

What are government regulations?

Government regulations are laws and executive orders made by the federal government. It helps maintain the order of the commercial market, protects the rights of its players, and collects funding for the public’s good.

What are the primary government regulations?

Here are some of the examples of government regulations that are implemented on a federal level:

On top of the federal standard, there are state and local governments that impose higher minimum wages for private sector companies.

  1. Labor and Employment Regulations

Federal regulations under this category focus on the rights of the workforce, the power behind small businesses, and workplace hazard protection. These regulations set the threshold for the minimum wage, penalize workplace discrimination, and more.

  1. Tax Regulations

Taxes are the primary sources of funding for the federal government. And as income-generating entities, small businesses are subject to follow the tax codes.

  1. Advertising and Privacy Regulations

There are companies that have succumbed to using underhanded tactics just for greed. And that is why these regulations protect the consumers from false advertising that is made to rake in sales.

And given how most people have shifted to online shopping, these regulations protect the customers’ sensitive information that is shared online with the vendors.

  1. Environmental Regulations

In the companies’ pursuit of profit, the environment suffers. The regulations under this category regulate businesses’ activities to align with the nation’s environmental codes.

  1. Antitrust Regulations

To ensure a fair and free market, the federal government puts in place regulations that prevent the monopolistic practices of some companies.

Have a more in-depth read about these primary categories of federal regulations on small businesses here.

The burdens imposed by countless federal, state, and local business regulations are putting a damper on the economic growth of the country.

The Impact Of Government Regulations On Small Business

The purpose of federal regulations for businesses looks good on paper. But, the effects of these excessive regulations put an unnecessary burden on small businesses.

From 1995 to 2016, nearly 90,000 federal rules and regulations govern businesses. This staggering number of regulations is not only confusing to an ordinary small business owner—but also costly. And all of these are on top of the complicated procedures and extensive list of requirements needed to become a government contractor.

But before we get down into the nitty-gritty of it, let’s first define the makings of small business owners and why they are taking the brunt of these excessive federal regulations.

Who are the small businesses?

In a broader sense, the Small Business Administration (SBA) categorizes small businesses as independent businesses that employ less than five hundred employees. These businesses account for more than 99% of all the companies in America. And nearly half of the U.S. workforce population, or 46.8%, are employed by small businesses.

Small businesses might be small, but their impact on the U.S. economy is massive.

These small enterprises are one of the vital components of the U.S. economy that stimulate its growth. They create new jobs, diversify industry markets, challenge corporation giants to keep their prices competitive, drive innovation, and push economic growth.

What is the status of small businesses in the federal government contracting arena?

Government contractors were instrumental in America’s recovery from the onslaught of the pandemic. The government mobilized medical and health care companies to develop vaccines against COVID-19, government contractors in the construction industry were tapped to drive infrastructure growth, and the federal government hired IT service providers to boost productivity and increase cybersecurity.

In 2020 alone, the federal government awarded a record-breaking $145.7 billion worth of contracts to small businesses. This is roughly 26% of the total dollars spent on federal contracts. It is undeniable how instrumental small businesses are to the federal government and the U.S. economy.

Small businesses are the leading movers of the American economy. As of 2021, 32.5 million or 99.9% of U.S. businesses are considered small businesses. But with the onslaught of the COID-19 pandemic that paralyzed supply chains, 94% of small businesses said they were negatively impacted by it. And nearly half of those numbers said they were severely affected by it.

Overregulation is one of the reasons why there are fewer startups today.

Why are small businesses the most affected by federal regulations?

Even though small businesses are integral to the U.S. economy, the small business sector still felt the most impact of the implemented government regulations.

  1. Lack of funding

Unlike corporation giants, small businesses need to manage their operations with only limited resources at hand.

Small businesses are the most sensitive to economic changes. With the economic paralysis brought about by COVID-19 restrictions and the inflation, recovering is even more difficult. The mere act of keeping the business afloat despite all of these is costly. And sadly, the federal regulations are making it even more expensive to keep businesses up and running.

  1. Lack of access to the latest technologies

Keeping up with the competition can be challenging if the business is not properly equipped. From cloud computing services to company system software, small businesses can’t afford the luxury of investing in the latest technology the world has to offer. This predicament causes small businesses to lag behind their competitors in terms of productivity, efficiency, and profits.

To make matters even worse, the rising prices of goods and services are stopping small businesses from overcoming this hurdle.

The small business sector is taking the brunt of the impact of excessive federal regulations.

How do government regulations impede the growth of small businesses?

Small business regulations are made to maintain order and fairness within the market. However, these federal regulations seem to do more harm than good.

  1. It burdens small businesses with unnecessary costs

Resources are scarce for most small businesses. And that is why they need every penny to go where it can be fully maximized. However, federal regulations are taking a sizable chunk of that. Some of the regulations that take out the biggest cut of a small business’s profits are taxes and workers’ compensation.

For example, the federal government is planning to implement an increase in corporate taxes, and small businesses will be hit hardest. From 21%, corporations, whether big or small, will pay 28% worth of corporate taxes. Although this initiative is made to tax the bigger corporations, small businesses are not safe from this.

Additionally, there are new direct costs every small business with employees has to take on: the Workers Compensation and Unemployment Insurance Laws.

Small businesses, particularly startups, suffer the most from these imposed costs on them by the federal government. On top of the minimum wage set by the U.S. government, they also have to subject themselves to the minimum wage threshold set by the state where their company resides. Since most of these startups operate within a limited budget, they were forced to compromise their business growth to comply with the federal regulations. In fact, in a 2017 study, the minimum wage of startup founders in the tech industry can be as little as $5.61 during the first year.

On top of that, small business leaders also have to set aside a budget for their workers’ insurance policies. Depending on the state where their company is registered, a small business must pay $657 – $2,340 per employee for its insurance. Small businesses across the country spend an estimated $71 billion annually on their workers’ insurance.

With more than 90,000 federal, state, and local regulations, navigating them all requires a specialist. This means small business have to shell out more money to afford field experts to ensure their company is compliant with all the regulations.

  1. It traps small business owners in the legal maze of regulations 

Government regulations on businesses can cost a great deal of time and money to small business owners. Aside from the long list of laws and regulations issued by the federal government, they also have to know the different regulations implemented by their respective state and local governments.

With more than 90,000 federal and local regulations to take note of, small businesses are often left scratching their heads in navigating this confusing legal maze. Before a small business can put up shop, it must apply for the necessary permits and licenses. They have to file their taxes, hire employees per federal and local regulations, draft sound contracts—and a lot more.

Small business leaders wear many hats, from managing their business to doing the hard labor to keep their company up and running. To give them the burden of learning the hoops of this complicated regulation structure is a huge disservice to the small business industry—and the U.S. economy in general. They may choose to do it by themselves or hire a professional to navigate this tangled web of regulations, but no matter what they choose, they will still shell out a significant amount of resources. Instead of channeling their resources towards their business’ growth and innovation, they spend most of it on regulation compliance.

  1. It hinders small businesses from expanding to other states

It is every business leader’s ambition to expand their business to the horizon. However, the conflicting local regulations among different states can become a roadblock to small businesses who are thinking of inter-state expansion.

These legal obstacles to expansion are better explained in this talk hosted by the U.S. Chamber of Commerce. An Illinois-based psychotherapy service provider is saddled by lack of work and occupational licensing portability. Since there are different regulations governing every state, their staff must get a new occupational license based on the regulations of the state they’re expanding to, even if they already have one.

Hindrances such as these discourage small businesses from branching out to different states, thus killing opportunities to help the U.S. economy prosper.

  1. It makes American small businesses less globally competitive

The complexity and volume of government regulations for business are crippling small businesses. Since small businesses are more worried about complying with the sheer amount of regulations, their capability to innovate for global competition suffers.

As drivers of change and development, unreasonable bans and restrictions over specific industries have negatively impacted small businesses, particularly startups. Take this for example: there is a great demand for marijuana that can open up business opportunities for Americans. However, the use of marijuana is still not fully legalized across all states. Currently, only 19 states have approved its use both for medical and recreational purposes, and the remaining states are still yet to jump on board.

In states where marijuana is legalized, more and more businesses have developed a way to make the marijuana industry more professional, efficient, and profitable. Encouraging research and development on up-and-coming industries can unlock new doors for America—and discover ways on how the country can retain its edge among its global competitors.

  1. It discourages small business owners from investing

Government and local regulations set the climate of the commercial industry. It can either encourage or prevent business leaders from putting up their own small companies. However, by the looks of the current status of business regulations in the U.S., small businesses are uncertain about the future of their companies due to overregulation.

In a study cited here, one of the leading concerns of small businesses is the regulations imposed by federal, state, and local governments—which is worsened by the global pandemic. The COVID-19 restrictions didn’t help alleviate the small business owners’ fears. It increased their unease about the government’s regulatory powers over them.

The COVID-19 pandemic disrupted the global economy, resulting in countless businesses closing up for good. In order to help the U.S. economy recover, the government is pushing the private sector to start new businesses. However, the government’s initiatives to drive growth are being held back by the looming wall of regulations. Corruption, red tape, unreliable bureaucracy, excessive costs, and complex procedures of federal regulations deter new business establishment across all industries, including government contracting.

Federal agencies should work hand-in-hand with the small business sector to identify ways on how federal regulations can help businesses achieve their maximum potential.

What can the government do to lessen the negative impact of regulations on small companies?

It is true that government regulations on business help keep the marketplace fair for all. However, slapping on too many regulations is hurting the cornerstone of the U.S. economy—the small businesses. Small business advocates should be at the forefront of change, asking government agencies to prioritize regulation reforms.

The government has a long way to go in regards to studying how to design and implement federal regulations on businesses. Given how the country is still reeling from the effects of the global pandemic, the administration should consider revisiting the entire business regulation process. It should be flexible, up-to-date with the nation’s current state, and gives importance to the economy’s foundation—the small businesses.

Sign Up Now! ExecutiveBiz provides you with Daily Updates and News Briefings about Articles


Written by Cielo Cinco

She is an advertising copywriter and content creator who writes about the federal government contracting industry and its key players who make waves across the GovCon field.

Monkton Rolls Out Application for USAF Aircraft Preparation; Harold Smith Quoted - top government contractors - best government contracting event
Monkton Rolls Out Application for USAF Aircraft Preparation; Harold Smith Quoted
Executive Spotlight: Kim Waiyaboon, CEO of SDV International - top government contractors - best government contracting event
Executive Spotlight: Kim Waiyaboon, CEO of SDV International