Business Enterprise

V 1-107. General note.

Statistics on the total number and the size distribution of business firms must be used with caution. No governmental process records all firms, and an entirely satisfactory definition of a firm seems impossible. The boundary between self-employment and conduct of a business firm is hazy at best. In addition, there are problems of inactive or partly (e.g., seasonally) inactive firms, joint ventures, partial interests, ownership of multiple firms by individuals and families, etc. Moreover, the characteristic which causes an enterprise to be counted as, for example, a corporation, an employer subject to social security, or an operator of an establishment requiring a sanitary or safety license, varies with laws creating these categories and with degree of thoroughness of administration of these laws.

These difficulties are compounded when an attempt is made to group firms into industrial categories, because industry boundaries must be arbitrary, and the assignment of a firm on one side of the boundary or another may be based on a 50-percent rule or on some convention lacking analytic justification. Or the activity may not fit well into any recognized category.

The statistical importance of these problems is great because of the unusual size distribution of the business population, which contains a large number of very small firms, and a minute proportion of larger firms accounting for a substantial or even predominant fraction of total activity. Many small firms are on the boundary line between recognition and nonrecognition (enumeration or nonenumeration), so that a slight difference in method or source, particularly one of which the statistician is unaware, may generate considerable but spurious change or absence of change in the total number of firms. If, however, the object of estimation is not number of firms but total activity, the radically unequal size distribution becomes a great advantage because it permits more efficient sample design at lower cost.

The number and percentage of business firms, therefore, must be used with a realization that the meaning of a business firm is not always certain and that the figures are subject to considerable error. The most meaningful statistics of the business population are those which are based on some consistent criterion or definition over a period of years. The business population studies of the U.S. Bureau of Economic Analysis may be said to have inaugurated the publication of such satisfactory statistics.

The record of one particular year's activity is in effect a single observation out of the infinite number which might be generated by the structural condition which is the object of measurement. Strikes, accidents, and cyclical fluctuations, with highly unequal impact upon various branches of industry, cause a divergence of the actual year's activity from the theoretically true or representative (average) year. Furthermore, if the incidence of mergers (series V 38-39) is substantial, a given year may be the peak or trough of a short-run change in concentration. Moreover, concentration measures may be strongly affected by the arbitrary nature of industry subdivisions, changes in industry classification between census years, and turnover of companies among those designated as the largest.

V 1-12. Proprietorships, partnerships, and corporations-Number, receipts, and profit, 1939-1970.

Source: U.S. Internal Revenue Service. Statistics of Income, Business Income Tax Returns, 1965 and 1968 issues; Statistics of

Income, Individual Income Tax Returns and Statistics of Income, Corporation Income Tax Returns, various issues; and unpublished data. Proprietorships, partnerships, and corporations encompass virtually all American businesses except those reported to the Internal Revenue Service by fiduciary agents of estates and trusts and the business activities of "exempt" organizations.

"Proprietor" applies to anyone with income from a single-owner business who had specified minimums of self-employment income or gross income during the year. (For historical details, see Statistics of Income, Individual Income Tax Returns, 1965, p. 206.) Thus, the proprietorship data cover the farmers, businessmen, and professionals who are in business for themselves on a full-time or part-time basis. Generally, a proprietor corresponds to a "self-employed" person, other than partners. However, some types of persons defined as selfemployed in the Internal Revenue Code are not considered as businessmen in the tax returns report. The most important of these are clergymen and public officials, such as sheriffs, notaries public, etc. Often, classification of a person as a proprietor depended entirely on how he reported his income.

"Partnership" applies to any group of two or more persons conducting a business for profit unless it is specifically classified as a corporation for tax purposes.

"Corporation" includes most businesses incorporated under State law and, in addition, many unincorporated associations, such as mutual insurance societies, savings and loan associations, and real estate investment trusts.

Repre

V 1, V 4, V 7, and V 10, number of business organizations. sents the number of active businesses operated as proprietorships by individuals, the number of active partnerships, and, for corporations, the number of active corporation tax returns filed, including those for small business corporations. The total number of corporations is slightly understated to the extent that subsidiary corporations are included in a consolidated return filed by a parent corporation.

V 5-6, business receipts and net profit (less loss) for proprietorships. In general, series V 5 represents gross receipts from sales and operations reduced by the cost of returned goods and allowances. Receipts include incidental income from such things as sale of scrap or cash rebates. Dividends, interest, rents, royalties, and other investment-type income are generally excluded, although rents or interest that represent income from business operations are sometimes included (e.g. rents received by real estate operators and interest received by small loan companies). Series V 6 represents the difference between business receipts and the sum of cost of goods sold and other business deductions. It does not reflect investment income; and salaries to owners and contributions or gifts are not allowed as deductions from proprietorship business receipts.

V 8-9, total receipts and net profit (less loss) for partnerships. Series V 8 represents the sum of business receipts (the income from the partnership's principal business activity), investment income such as interest, rents, royalties, nonqualifying dividends, net gain from sale or exchange of noncapital assets, income from farms and other partnerships, and other income. Total receipts do not reflect net losses from the foregoing sources.

Series V 9 represents the difference between total receipts and the sum of cost of sales and operations and other business deductions. The deductions for partnerships exclude both contributions or gifts and additional first-year depreciation.

The term "net profit" is used for both proprietorships and partnerships although it is not strictly comparable for the two forms of business organization. Three differences are (1) investment income is reflected in the partnership, but not in the proprietorship, net profit, (2) salaries paid to the owner(s) are a business deduction for partnerships but not for proprietorships, and (3) additional first-year depreciation is a deduction in the computation of proprietorship, but not partnership, net profit.

V 11-12, total receipts and net profit (less loss) for corporations. Series V 11 includes the gross taxable receipts (i.e., business receipts, taxable investment, income, and certain foreign income) before deduction of cost of sales and operations and net losses from sales of noncapital assets. It also includes nontaxable interest, but excludes all other nontaxable income recognized by the corporation.

The source refers to series V 12 as "net income (or deficit)." It is defined as the difference between gross taxable receipts and the sum of cost of sales and operations and other business deductions allowable for tax purposes. The concept of net income for corporations is not strictly comparable with the concept of net profit for proprietorships and partnerships.

V 13-19. Number of firms in operation, by major industry group,

1929-1963.

Source: U.S. Bureau of Economic Analysis (formerly Office of Business Economics). 1929-1939, Survey of Current Business, January 1954, p. 12; 1940-1950, unpublished data; 1951-1958, Survey of Current Business, May 1959, p. 18; 1959-1963, Survey of Current Business, June 1963, p. 2.

These estimates are based primarily on data from the Bureau of Old-Age and Survivors Insurance and the Internal Revenue Service, and are revised from time to time by the Bureau of Economic Analysis (BEA), formerly the Office of Business Economics. The last substantial revision was made in January 1963 and revealed errors in the earlier estimates for absolute number and rate of growth; these errors were due partly to the cumulative effect of imperfect estimates for discontinued businesses. BEA defines a firm as a business organization under one management; it may include one or more plants or outlets. A self-employed person is considered a firm only if he has either one or more employees or has an established place of business. Concerns owned or controlled by the same interests are not combined. Agriculture and professional services are excluded. A firm conducting more than one kind of business is classified by industry according to the major activity of the firm as a whole. Revisions of the Standard Industrial Classification (see Bureau of the Budget, Standard Industrial Classification Manual, 1963) have, therefore, affected the industrial distribution of firms.

V 20-30. Business formation and business failures, 1857-1970. Source: Series V 20 and V 23-30, Dun & Bradstreet, Inc., 18571919, Dun & Bradstreet Reference Book and Failure Statistics (a printed mail folder distributed by Dun & Bradstreet); 1920-1970, The Failure Record Through 1971, and unpublished data. Series V 21-22, U.S. Bureau of Economic Analysis. Series V 21, 1971 Business Statistics, p. 37; series V 22, Business Conditions Digest, June 1971, series B 12. V 20, total concerns in business. This series represents the number of business enterprises listed in the Reference Book. The figures are for conterminous United States (i.e., excluding Alaska and Hawaii) and represent listings in the books published nearest to July 1 of each year. The listings include types of business which are seekers of commercial credit in the accepted sense of the term; namely, manufacturers, wholesalers, retailers, building contractors, and certain types of commercial service, including public utilities, water carriers, motor carriers, and airlines. Specific types of business not covered are finance, insurance, and real estate companies; railroads; terminals; amusements; and many small one-man services. Neither professions nor farmers are included.

V 21, new business incorporations. This series represents the total number of stock corporations issued charters under the general

business corporation laws of the various States and the District of Columbia. The statistics include completely new businesses that have incorporated, existing businesses changed from the noncorporate to the corporate form of organization, existing corporations given certificates of authority to operate also in another State, and existing corporations transferred to a new State. Data for incorporations in the District of Columbia are included beginning January 1963.

V 22, index of net business formation. This series is compiled from monthly national data on number of new business incorporations, number of business failures, and confidential data on telephones installed. These components are adjusted for seasonal variation and number of trading days before being combined into the index.

V 23-26, business failure rate and business failures. The failure rate is obtained by dividing total failures by the total number of industrial and commercial enterprises listed in the Dun & Bradstreet Reference Book. Failures are defined as concerns involved in court procedures or voluntary actions, probably ending in loss to creditors. These include, but are not limited to, discontinuances following assignment or attachment of goods, bankruptcy petitions, foreclosure, etc.; voluntary withdrawals with known loss to creditors; enterprises involved in court action such as receivership; businesses making voluntary arrangements with creditors out of court; and since June 1934 (enactment of the Bankruptcy Act), reorganization which may or may not lead to discontinuance.

V 27-30, liabilities. Average liability per failure is obtained by dividing total liabilities by total concerns. Liabilities represent primarily current indebtedness, including accounts and notes payable on secured or unsecured obligations held by banks, officers, affiliates, suppliers, or government at all levels. Beginning in 1933, certain types of enterprises characterized by heavy deferred obligations were eliminated from the data, thus conferring a slight downward bias in average liability figures as compared with earlier years. These series have undergone two revisions. In 1933, they were revised to exclude real estate and finance companies. This revision brought the failure record more nearly in accordance with type of concerns covered by series V 20. In 1939, the series were revised to include voluntary discontinuances with loss to creditors, and small concerns forced out of business with insufficient assets to cover all claims.

V 31-37. Number of new, discontinued, and transferred businesses, by major industry group, 1940-1962. Source: See source for series V 13-19.

New businesses include only firms which have been newly established. Discontinued businesses include closures of all kinds without reference to the reason for going out of business. A firm which is maintained as a business entity but undergoes a change of ownership is counted as a transferred business, not as a discontinuance. Partnerships in which a member is added or dropped, corporations that are reorganized or reincorporated, and businesses sold or otherwise acquired by new owners or changed in legal form of organization (such as partnership to corporation) are considered transfers. Note should be taken of the large differences between figures for failures in series V 24 and those for discontinued businesses in series V 31. V 38-40. Recorded mergers in manufacturing and mining, 1895–1970. Source: 1895-1918, Ralph L. Nelson, Merger Movements in American Industry, table 14, p. 37, Princeton University Press, 1959 (copyright, National Bureau of Economic Research, New York); 19191930, Carl Eis, The 1919-1930 Merger Movement in American Industry, table 1 (reprinted from The Journal of Law and Economics, vol. XII (2), October 1969, The University of Chicago (copyright)); U.S. Federal Trade Commission, 1919-1955, Report on Corporate Mergers and Acquisitions, 1955; 1956–1970, Current Trends in Merger Activity, 1970.

Methods of estimation of the Nelson figures are explained in chapters II and III of his book; the basic source of the figures is chiefly the Commercial and Financial Chronicle. The Eis figures

Federal Trade Commission (FTC) estimates include mergers reported by Moody's Investors Service, Inc., and Standard and Poor's Corporation. For 1919-1939, the estimates were first made by Willard L. Thorp in various publications, and then continued by the FTC. For complete sources and related data, see the FTC reports cited above.

The annual totals of reported mergers are only a small fraction of all "transferred businesses," as shown in series V 31-37. Series V 38-39 are essentially a count of all mergers and acquisitions involving corporations with widely held or publicly traded securities outstanding. There are two offsetting biases of uncertain amount: Mergers may be announced but not actually consummated; small acquisitions by registered manufacturing companies may be consummated without announcement in the sources used.

The FTC series and the Nelson-Eis series use different sources, each of which changes in degree of coverage over time, and are not comparable. The FTC estimates include a more complete recording of smaller mergers, so that average capitalization or assets per merger would on this account tend to decrease, and total assets to increase. However, value data are not available for this series because the FTC does not collect such data for concerns with assets of less than $10 million. Such concerns represented 93 percent of the 1,351 concerns acquired in 1970.

V 41-53. Number of corporations, by industrial division, 1916–1970. Source: 1916-1933, U.S. Bureau of Internal Revenue, Statistics of Income, various annual issues; 1934–1970, U.S. Internal Revenue Service, Statistics of Income, Corporation Income Tax Returns, various annual issues.

After 1925, trade is divided into wholesale trade, retail trade, and trade not allocable. The latter, series V 48, varies widely owing to changes in inclusion. The joint figure of wholesale and retail trade for 1916 is not comparable with figures for subsequent years because the "merchandising companies" group was not as inclusive as the "wholesale trade" and "retail trade" groups. This is reflected in the very large figure for all other active corporations. The same is true of "finance, insurance, and real estate" (series V 50) for 1916, then labeled "banks and insurance companies."

V 66-77. Income of unincorporated enterprises, by industry, 19291970.

Source: U.S. Bureau of Economic Analysis (formerly Office of Business Economics). 1929-1963, The National Income and Product Accounts of the United States, 1929-1965; 1964-1967, U.S. National Income and Product Accounts, 1964-67; 1968-1970, Survey of Current Business, July 1972. Table 6.8.

These series measure the earnings of unincorporated business-sole proprietorships, partnerships, and producers' cooperatives-from their current business operations, other than the supplementary income of individuals derived from renting property. Capital gains and losses are excluded, and no deduction is made for depletion.

Estimation in this field has generally required laborious piecing together and adjustment of various types of data from numerous sources. The estimates rely heavily on tax-return tabulations of the incomes of sole proprietorships and partnerships prepared by the Internal Revenue Service.

For a general summary of estimation sources and methods, see Office of Business Economics, National Income, 1954 edition, p. 76 ff.

Source: U.S. Bureau of Economic Analysis (formerly Office of Business Economics), 1971 Business Statistics, pp. 23-25.

V 78-87, sales. These are estimated aggregate dollar values for the year. "Sales" means essentially billings or shipments for manufacturing and sales or shipments for retail and wholesale trade. In wholesale trade, however, some respondents probably report orders (bookings) as sales.

V 79-81, sales, manufacturing. As used here, "sales" represents manufacturers' receipts, billings, or the value of products shipped, less discounts, returns, and allowances, and exclude freight charges and excise taxes. Shipments for export as well as for domestic use are included. Shipments by foreign subsidiaries are excluded, but those to a foreign subsidiary by a domestic firm are included. The shipments figures from the Bureau of the Census, Annual Survey of Manufactures, to which these series are benchmarked, include interplant transfers as well as commercial sales. The figures include adjustments for trading-day and calendar-month variations.

V 82-84, sales, retail trade. The definition of sales of retail stores is in accordance with the 1963 Census of Business. Sales are total receipts from customers after deductions of refunds and allowances for merchandise returned by customers, and include receipts from repairs and from other services to customers, sales for resale, and sales and excise taxes. The data represent total sales and receipts of all establishments engaged primarily in retail trade; they do not include sales at retail by manufacturers, wholesalers, service establishments, or other businesses whose primary activity is not retail trade. The breakdown into durable goods stores and nondurable goods stores is based on the durability of the commodities accounting for the major portion of the sales of each kind-of-business group.

Retail sales estimates are developed as direct measures from a sample representing all sizes of stores, firms, or organizations, and all kinds of retail business throughout the country. Because the estimates obtained are based on a sample, the results are not expected to be in exact agreement with those that would be obtained from a complete census of retail stores in which the same enumeration procedure would be used. For details concerning the sample, see 1971 Business Statistics, blue pp. 58-59.

V 85-87, sales, merchant wholesalers. See text for series T 375-383.

V 89-91, inventories, manufacturing. Inventory data are book values of stocks on hand at the end of the period, and include materials and supplies, goods in process, and finished goods. Inventories associated with the nonmanufacturing activities of the company are excluded. Manufacturers' inventories are generally valued at the lower of cost or market price while retail and wholesale inventories are valued at cost of merchandise on hand. About one-fifth of manufacturers' inventories are valued on a last-in-first-out basis (see general note for series V 108-305) which is much less prevalent in trade although it is used extensively by department stores. Changes in the book value of inventories reflect movements of replacement costs as well as changes in physical volume.

V 92-94, inventories, retail trade. These data represent estimated book values of nationwide retailers' inventories, valued at the cost of merchandise on hand. Data for Alaska and Hawaii are included beginning 1946.

The breakdown into durable and nondurable inventories is based on the durability of the commodities accounting for the major portion of the retailers' sales. Thus, nondurable items carried by the retailers dealing primarily in durable goods would be reported in durable goods inventories.

V 95-97, inventories, merchant wholesalers. See the text for series T 375-383.

V 98-107, inventory-sales ratios. See the text for stock-sales ratios, series T 375-383.