The Secretary of the State, Denise Merrill, is proud to partner with the CT Data Collaborative and provide to the public unprecedented free access to robust business registry data. In addition to making the data public through exploratory, web-based visualization tools, CTData presents a few of the interesting trends in the story below. As we build out the portal, we will continue to examine the trends in the data and share the stories.
What Businesses file with the Secretary of the State?
As required by law, certain business entities must register with the Secretary of the State’s (SOTS) office. The types of businesses that must register include: Business Corporations, Nonstock Corporations, Benefit Corporations, Limited Liability Companies, Limited Liability Partnerships, Limited Partnerships and Statutory Trusts. The only business types NOT required to file with the SOTS office are Sole Proprietorships and General Partnerships – these business types file with town clerk’s office in the town in which they reside. (A small number of General Partnerships voluntarily register with SOTS, and are present in our data, however it is not a comprehensive measure of the formation of General Partnerships.)
Trends in Business Formation and Dissolution
CTData explored business formation and dissolution data since 1980. In general, both formations and dissolutions have been on an upward trend. As shown in the chart, the number of business establishments tends to rise and fall with the business cycles of the overall economy.
In each of the recessions, business formations started declining leading up to each of the recessions. However, the dip in business formations had a longer more protracted downward trend during the Great Recession than when compared to the dip leading up to the recession in the early 2000s.
Chart 1: Business Formations and Dissolutions, 1980-2015
What’s driving the dramatic increase in business formations starting in 1994?
Beginning in 1994, legislation was passed that enabled the formation of LLCs. As shown in the chart below, between 1994 and 2015 the share of businesses forming that were LLCs grew from 0% to 84%. At the same time, Corporations decreased – going from 94% of the share of formations to 15%. Meanwhile, the share of ‘Other’ business types has ranged from 1% (1994) to 5% (1996) and then decreasing since then down to its current 1%.
Chart 2: Business Formations by Type, 1992-2015
Administration Actions Affecting Some of the Trends
In 2008, the Department of Revenue Services (DRS) began enforcing assessment and collection of the Business Entity Tax (BET). The BET was enacted in 2002 and became effective in 2003. Principals of defunct entities were held personally liable for the back-owed BET liability of their defunct entities. After getting hit with a penalty-and-interest-laden tax bill, many of these entities filed their dissolutions rapidly, to avoid additional exposure for future tax years. This action on the part of DRS could be the cause for the upward trend in dissolutions.
Also beginning in 2008, the Secretary of the State’s office sought to more actively pursue administrative strategies to address potential inaccuracies in the public record. One such effort included a postcard campaign to entities with out-of-date Annual Reports, requesting them to either file a dissolution or else file back-owed Annual Reports to catch up. Businesses that were no longer active would have filed dissolutions to avoid the fees associated with filing Annual Reports.
We also examined the lifespan of businesses as a factor of the year in which they formed. To do this, we examined the number of entities that filed formation paperwork in any given year and calculated the number of years in existence until a dissolution filing.
After 10-15 years in business, 60-70 percent are still in existence
This line chart shows how many survive from year to year. What’s interesting is that survival rates of businesses follow similar trajectories, regardless of the birth year. As seen in the chart below, on average:
- After 5 years, 80% are still in business
- After 10 years, 70% are still in business
- After 15 years, approximately 60% are still in business
Chart 3: Business Survival Rate by Year Formed
To explore how birth year impacted survival rates, we picked two birth cohorts - all those businesses that started in a given year. We chose 2000 and 2008 as these years represent two peaks in business formation and also two distinct economic cycles (as shown in charts 1 and 2).
CTData looked to see if there were differences in the survival of a business by the type of business – Corporation, LLC, and then all others.
Corporations, on average, had similar survival rates whether they formed in 2000 or 2008. However, when looking at the survival rates of LLCs and Other business entity types, after 8 years, the survival rate is different. For LLCs that started in 2000, 79% were still in existence compared with 74% for those that started in 2008. For the ‘Other’ category (this includes LLps, LPs, etc) 81% of those that started in 2000 were still in existence compared with 76% of those that started in 2008.
This may not be surprising since one might expect it be more difficult to stay in business when starting during a recession.
Chart 4: Business Survival Rate, 2000 and 2008 Formation Cohorts
Important Disclaimers about the data
In 1994, legislation passed that removed the Secretary of the State’s authority to remove defunct business entities from public record. This change came into effect in 1995 and pursued until 2014 when authority was returned to the SOTS. This means that when we count the number of businesses in existence it may be overstated if they didn’t file a dissolution. In the charts above, there could be defunct businesses that we are assuming are still in business since no dissolution was filed resulting in the counts being overstated.