Small Business Cost & Regulatory Hurdles in New York City
The following entry is part of The Small Business Corner, a collaboration between Gotham Gazette and GoBizNYC:
We seldom hear small business owners weigh in on the public policy issues that impact their ability to hire and grow in New York City, partly because they are busy earning a living and partly out of their fear of getting embroiled in politics that could impact their customer and regulatory relationships. The following is a telling interview with Rachel, an entrepreneur who asked us not to use her last name, but whose story reflects the experience of neighborhood businesses throughout the five boroughs.
Why did you decide to start a business in NYC?
I grew up in NYC and have chosen to raise my family here. This is the best city in the world and, after over a decade as a retail executive in Corporate America, I decided to open up a retail children's store in the neighborhood where I grew up. Children's retail is a great business and there is nothing better than making a child smile.
What have been unexpected challenges you've faced?
I have been surprised by the number of hurdles you face when trying to open a business in NYC. For example, I hunted for weeks to find an "affordable" space. I found a great location for about $16,500 per month, but with all my fixed costs, I need to do over $700,000 in sales annually just to break even. That is simply a bucketload of merchandise that I need to sell each year and makes me charge prices that are higher than I would like.
Then you get to taxes and realize the situation is even worse. When deciding how to structure my business, I was leaning toward registering as an S Corp, since this typically provides tax and legal advantages compared to registering as a Limited Liability Corporation (LLC). But then I found out that NYC does not recognize S Corps, subjecting them to an 8.85% General Corporation Tax. So I said, 'Okay, I will become an LLC instead.' I then discovered that LLCs are subject to a 4% Unincorporated Business Tax (UBT) in NYC, with Medicare and Social Security taxes on top of that. So you get hit hard no matter which structure you choose. There is a tax credit available for small businesses that pay the UBT, but only those that do under $150,000. If I do that volume, I would need to shut my doors.
Lastly, there are many local mandates that have been passed that are going to burden small businesses even more and hurt employees at the same time. Quite frankly, if I didn't love NYC and wasn't raising a family here, I definitely would not be opening up here. I could go across the river to Hoboken and launch the exact same concept with a fraction of the costs and hassles.
Can you give an example of the impact of City regulations on small business?
The NYC Paid Sick Leave Law is something I have been learning about and trying to navigate. This law has great intentions – to make sure that each employee gets paid sick leave, if needed. I believe that this is the right thing to do and that employees should not be penalized if they are legitimately sick. But this law is unduly onerous to small employers. Given the fact that an employer has to pay for staff coverage while also paying for an employee who is out sick, even if you have just 5 full-time employees, your costs still increase by thousands of dollars each year.
This law also has unintended negative consequences on employees. I have found that employers are now very reluctant to give any one employee more than 15-25 hours per week. They would rather have more part-time employees and delay their accrual of paid sick days – it just makes financial sense. Even worse, some businesses are misinterpreting the law, thinking that employees only earn the accrual if they work 30 hours per week, rather than 30 hours at any point, so they are cutting back their employees' hours. As a result, employees work fewer hours and accrue paid sick days more slowly. This is a well-meaning but not well-thought-out law that ends up hurting the very people it aims to help.
How does this law affect your hiring decisions?
I have to think seriously about who I am hiring and whether they might need more sick leave than someone else. I am a very sympathetic person and would give my employees whatever they legitimately need to take care of personal or family illness. But I am nervous someone will take advantage of me. Since this law does not require a doctor's note unless someone is out for 3 days in a row, you can envision that even the most well-meaning employees might take advantage of a full paid day off. Sure, most employees are honest and hopefully will not do this. But how can the employer know?
What could the City do to better support businesses as they strive to appropriately comply with the new law?
The City needs to rethink paid sick leave for smaller companies. I suggest exempting small businesses with fewer than 20 employees, changing the rate of accrual to one hour per 40-50 hours worked, and starting accrual after the first 90 days of employment. The City also needs to continue educating employers, especially those who are misinterpreting the law.
I love NYC and I want my business to succeed and grow here. I have been impressed by many of the free resources the City has made available to small business owners online. That said, I wish the City would do more to help me financially. Given the high costs of doing business here as well as the costs of complying with local regulations, many small business owners are struggling to make ends meet, just like the employees who work for them. What will the City do to help us? Sometimes, it seems like the City wants us to go elsewhere.
Victor Wong is the Director of Business Outreach & GoBizNYC at the Partnership for New York City
To make or discuss a submission for The Small Business Corner:
Reach Gotham Gazette Executive Editor Ben Max at firstname.lastname@example.org
The Small Business Corner is a bi-weekly column featuring the opinions and perspectives of small business owners and advocates from the GoBizNYC network on the range of issues that concern the city's small businesses.
To all New York City small business owners and advocates: we hope this new platform, The Small Business Corner, will better enable you to engage in the local policy conversation and we look to you to support us in this endeavor by sharing your thoughts, experiences, and voices. To learn more about how you can be a part of GoBizNYC and participate in this effort, visit GoBizNYC.org.