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MinnEcon Blog
Paul Tosto

Filings for new Minnesota corporations take a dive

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For a while during the recession it looked like we were seeing something surprising -- new businesses start-ups in record numbers in Minnesota despite the lousy economic times.

A broader look at all the data from 2007 to newly available numbers for December 2010, though, show that's not the case. The overall jump in new business filings is an illusion.

Total new business filings jumped in 2009 (see the chart below), making it seem like the ranks of new companies in Minnesota were swelling during the recession.

Much of that growth came in limited liability companies. But it's a statistical aberration. Here's why. New state rules that kicked in 2009 required many construction tradesmen to register with the state Labor Department and get an Independent Contractor Exemption Certificate. Instead, it appears many of those tradesman incorporated themselves as limited liability companies. As the Star Tribune wrote in an excellent piece on the issue:

Many of the construction workers setting up LLCs are legitimate one-person businesses, not employees. With their new corporate-like identity, they don't have to submit paperwork to prove it -- and as an added bonus they avoid a new 2 percent income-tax withholding on payments for their work.

So basically, the huge bump in business filings in 2009 didn't come from a rush of new entrepreneurs but from a paperwork change.

The certainty of that is confirmed in recently available data for 2010, which shows total new business filing numbers nearly identical to the pre-recession numbers from 2007.

When you break out the filing data for new business corporations, you find a decline you'd expect given the recession.

The reality is that filings for new corporations in Minnesota peaked in 2002 and have been falling since, dropping steeply during the Great Recession.

Every new business filing category is flat or down since 2007 with the exception of new limited liability companies, which we can see is not real business growth.

It's been said before: Compared to other states, Minnesota's not that bad off.

But the state needs jobs and they have to come from somewhere. We know now that self-employed numbers took a hit in the first year of the Great Recession. The manufacturing base is coming back but still has a long road back.

We like to hope that a new generation of entrepreneurs is getting ready to help drive the recovery. The business filings data initially held some promise of growth in the recession. It didn't hold up.