Minority Businesses Multiply But Still Lag Whites

Although the number of businesses owned by minorities is increasing, their economic impact isn't catching up yet

By John Tozzi

The number of minority-owned businesses is growing faster than average, and much of the increase is among companies with no employees other than the owner. (Data: U.S. Census Survey of Business Owners)

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The number of businesses owned by minorities increased faster than the number owned by whites, according to Census data released July 13. But minority companies' economic impact­—measured by total sales and how many workers they employ­—budged only a little from 2002 to 2007. And the percentage of minorities who own businesses is still far lower than the percentage of whites who do.

The number of minority-owned businesses increased from fewer than 4 million in 2002 to 5.8 million five years later, a 46 percent jump. That compares with a 14 percent increase in businesses owned by whites (to 22.6 million). African American-owned businesses recorded the biggest jump—60 percent—from 1.2 million to 1.9 million. Hispanic-owned businesses increased 44 percent, to 2.3 million, and Asian-owned businesses grew 41 percent, to 1.6 million.

"It's great that [the number of minority-owned businesses] is growing faster than average, but it's really a function of the base being so small," says Alicia Robb, a senior research fellow at the Kauffman Foundation who has studied minority entrepreneurship. She says the numbers are disappointing. "I was hoping for better news and didn't get it."

Women Benefit Too

The number of companies owned by women also increased, to 7.8 million in 2007 from 6.5 million five years earlier, a 20 percent jump. While sales at women-owned businesses rose, their share of total sales declined slightly, to 4.0 percent in 2007 from 4.2 percent in 2002.

Minority businesses employed just 5 percent of private sector workers in 2007, up from 4.2 percent in 2002. White-owned businesses employed 45 percent. (The rest were employed by publicly traded companies or other businesses that couldn't be classified by the owner's race.) Sales at minority-owned companies accounted for only 3.4 percent of all business receipts, up from 2.9 percent in 2002, but were still dwarfed by white-owned companies' 34 percent share of sales.

The jump in black business ownership is particularly significant, says Robert Fairlie, a professor of economics at University of California, Santa Cruz. He says blacks historically have owned businesses at only one-third the rate of whites, in part because of such barriers as lower personal wealth and less access to credit. "It could be that there's a lot of real increase here, that blacks are finally starting to catch up," he says.

Unemployed Become Freelancers

Most of that increase has come in businesses that employ only their owners, which include people working as independent contractors. Fairlie cautions that some of the increase may have resulted from larger companies reclassifying workers as contractors rather than payroll employees. "If firms move more and more toward contracting out, so they can avoid paying health insurance and everything, then more of our workforce gets pushed into what the Census is calling business ownership," he says.

The growth in minority businesses with no employees may presage more minority employers in years to come, says Brian Headd, an economist with the Small Business Administration's Office of Advocacy. "Business ownership has become more inclusive over the past 10 years," he says. The jump in self-employment among blacks is particularly encouraging, Headd says, because African Americans are so underrepresented. Blacks accounted for 13 percent of the U.S. population but just 7 percent of business owners, according to the Census data.

The Census' Survey of Business Owners polled a random sample of businesses based on tax returns from the 27 million companies in the U.S. in 2007. All but 5.8 million employed only their owners. The data do not reflect the effects of the financial crisis or the recession, and it's unclear whether the number of minority-owned companies is continuing to grow at the same rate today.

Because minorities on average are less wealthy than whites, minority-owned companies may have a harder time getting credit and be less able to draw on personal savings to sustain businesses, Fairlie says. "In terms of business failures or bankruptcies, a lot of the disadvantaged minority firms might be getting hit pretty hard because they don't have the personal wealth" that whites do.

Tozzi covers small business for Businessweek.com.

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