The Impact of Government Regulation on Small Businesses in the United States

Table of Contents

Introduction 3

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Problem Statement 3

Purpose Statement 4

Research Questions 4

The Significance of Study 5

Literature Review 5

Business Permits and Licensing 5

Taxes 5

Consumer Advertising 6

Environmental Legislation 7

Employment Laws 7

Discussion 7

Conclusion 9

References 11



Governments across the world establish numerous policies and regulations whose main objectives are to guide business operations. Rules such as minimum wage and zero tolerance to discrimination are mandatory and should be adhered to by all business entities in the United States, while other policies and regulations may influence a business entity indirectly. For this reason, it is essential for business owners and their management teams to make sure that they are conversant with all rules and regulations that may impact their businesses either directly or indirectly (Amor, 2018). Business organizations need to be flexible enough to enable them to adapt to the ever-changing rules and regulations without losing their competitive edge. This is true because these regulations are made on different levels such as the federal, state, and municipal levels, and for this reason, an organization should ensure that they adhere to all the regulations set. This paper draws evidence from legislation and business areas of study to support the role and impact of government legislation on the starting up of and running small businesses. the paper is important for those running small businesses and those intending to start new businesses as it equips them with the required knowledge on government legislation required to start and run their businesses. Government regulations on small businesses change regularly based on the prevailing situations and restrictions in terms of business permits and licensing, taxes, consumer advertising, environmental legislation, and employment laws determine the success of a small business. 

Problem Statement

The primary role of the government in any economy is to provide regulations and policies that can help bring about an environment that is devoid of anarchy. Controls help bring law and order, which is what enables business organizations to prosper. This is the main reason why the United States is interested in the regulation of small business enterprises in the country. However, these regulations have led to some impacts that have affected businesses positively or negatively (Statisca, 2019). Therefore, the purpose of this research paper is to discuss the impact of government regulations on small business enterprises. It will also be vital for the article to determine whether these impacts have had positive effects or negative effects on the business organizations in the country.

Purpose Statement

The purpose of this study was to discuss the various methods the United States government uses to regulate small business organizations and the impacts of these regulations on the business entities. Small businesses are subject to regulations in the form of business permits and licensing, taxes, consumer advertising, environmental legislation, and employment laws. Therefore, this study unravels the regulations and costs associated with each regulation and how they benefit or derail starting and operating a small business. 

Research Questions

  1. How does cost and regulations on permits and licensing affect the opening and running of small businesses?
  2. How does cost and regulations on taxes affect the opening and running of small businesses?
  3. How do regulations on consumer advertising affect the opening and running of small businesses?
  4. How do the regulations on environmental legislation affect the opening and running of small businesses?
  5. How do the regulations on employment laws affect the opening and running of small businesses?
  6.  What specific steps can a company take to make sure they comply with government regulations? 

The Significance of the Study

The importance of this study is that it will make an excellent contribution to the topic. The paper will give a good discussion as to why the government should regulate small business enterprises in the United States and the impacts of these regulations on business ventures and the economy as a whole.

Literature Review

Business Permits and Licensing

Many businesses require licenses and business permits to operate. Locally, cities and county governments require that new businesses or companies acquire permits and licenses to operate in their jurisdiction. (the United States, 2018) For instance, restaurants are required to have permits that show that they comply with the stated government regulations in health and sanitary. Additionally, the state or federal government issues new businesses like gun shops, bars, radio stations, and vets and doctors with specialty licenses (Iliev and Vitanova, 2019). To acquire this information, one can visit the specific state chamber of commerce or networking group of a specific industry. Moreover, this section will discuss how government requirements with regards to permits and licensing affect small businesses (Vasudeva et al., 2015). Moreover, the amount charged to acquire the respective permits and licenses determines the number of businesses opened in a given area. Besides, this section will compare information on the requirements and the amounts charged to have specific permits and licenses and come up with a conclusion on the effect permits and licensing requirements have on small businesses. Even though permits and licenses ensure that businesses operate in safe environments and the public is protected in terms of health and safety, they affect the rate at which businesses are opened. Other than business permits and licenses, taxes determine the level of investment in an area. 


Paying tax is both good and painful. Sales taxes are paid for selling goods or services and paying income tax means that one has an income. Having to comply with tax regulations is another downside of tax that small business needs to comply with (Nguyen, Donohue, & Mehrotra, 2019). The regulations require that when employers pay their employees they take payroll tax. Also, businesses should collect and pay sales tax based on their state government’s schedule. Furthermore, tax regulations require that one gets an employer identification number from the IRS to get business identification just like individuals are identified using the social security numbers. This section will also compare and contrast tax rates (Vasudeva et al., 2015), as well as tax exemptions and tax regulations of different states and find out the correlations between tax and rate of investment in specific states (Nguyen et al., 2019). Different states have different tax rates and tax regulations that small businesses have to adhere to, thus, determining the rate at which small businesses are started in a given state. Other than tax and tax regulations, consumer advertising plays a critical role in the starting of small businesses.

Consumer Advertising

Virtually, consumer advertising must adhere to stipulated government rules and regulations. In this case, small businesses must ensure that when they advertise their goods and services, they are within the stated rules and regulations (the United States, 2018). The regulations ensure that no fraudulent claims are made. For instance, when promoting health products, science is needed to back up the claims. Furthermore, for microfinance businesses, it is required that rates and interests are reported accurately (Christopher, 2015). Complying with consumer advertising regulations requires deeper research and expertise, which increases business expenditure and in turn, can affect the pricing and profits from given products. The impact of government regulation on consumer adverting will be the area of focus in this section and results from different states will be given. Besides, having to adhere to consumer advertising regulations, meeting the environmental legislation requirements is important for any new and continuing business.

Environmental Legislation

Both the state and national governments have several regulations that small businesses must keep to ensure that the environment (soil, water, and air) is not polluted. Manufacturing businesses are required to follow regulations when disposing of wastes, smoke, and byproducts from their factory (Jan Adamiak, 2019). Additionally, white-collar businesses where a building is constructed, regulations controlling the amount of stormwater that can run off the building must be met to ensure that buildings are safe (the United States, 2018). Different states have different environmental regulations that must be met to ensure public safety. These regulations will be discussed here and their impact on small business investment in different states presented. Furthermore, after complying with the environmental legislation,  businesses must adhere to employment laws implemented by the government. 

Employment Laws

State and federal government stipulate rules and regulations that govern how employers should treat their employees. These regulations ensure that workers are not discriminated against during the hiring and firing process based on their religion, race, ethnicity, age, gender, the nation of origin, and disability. Besides, when hourly employees work for over 40 hours a week, they are entitled to overtime pay (Vasudeva et al., 2015). Employees should also be provided with insurance to cover them when they get injured while on duty (Jan Adamiak, 2019). Other rules also require that employees are given time offs due to medical conditions and pregnancy. This section will, therefore, focus on specific employment laws in different states and find out their impacts on small business investment. 


The role of the government in developing economies vary in phases of market reform. In industrialized countries like the U.S., the State highly regulates the pace of SMEs as it is a mature economy. This is because the government exerts external factors to influence the pace and the nature of small businesses rather than direct support. Chittenden, Kauser, and Poutziouris (2003) argue that the compliance cost of taxation in the UK and the USA follows the largest single element of the compliance burden for SMEs, which is similar in New Zealand and Australia. The countries have applied the model of simplifying initiatives and deregulation because there is no direct correction with tax regulations. 

Negotiating culture between workers and employers over time is important. The culture is to create understanding in a well-organized labor market, as well as where the legislator and the state have a detached and supporting role (Cagan & Simonyi, 2018). A rate from an organization with a high international comparison on both employer and employee side has underpinned the functioning and the legitimacy of the model. It is perceived that “compromise competence” built is a contradiction to the relationship between two portions of the labor market in many other places.  There should be fewer instances regarding inequality and great social security (Cagan & Simonyi, 2018). Proportional representations in the political negotiation culture foster a degree of pragmatism that needs compromises and chime labor market development (Larsen et al., 2015). The development resulted in well-functioning and prosperous societies. 

The healthcare system in the United States has a long heritage. It is well-established due to primary and preventive healthcare. As a result, it sophisticates occupational health standards. Moreover, the markets have less impact on the functioning of the healthcare system. Additionally, equality and equity are prioritized at the political level, as well as productivity and efficiency (Larsen et al., 2015).  For instance, Finland and Denmark have achieved minimum patients’ attendance time and improved hospital productivity. Additionally, Iceland, Norway, and Denmark do not charge variable hospital fees.

Protecting workers is inevitable for any business – especially precarious workers. Occupational Health and Safety Act (OHSA) sets minimum requirements concerning safety in the workplace: the Employment Standard Act (ESA) sets minimums protections like hours at work. Furthermore, the government introduced exceptions to workers from sectors like construction and agriculture. The workers have been protected from the employer’s misconduct like terminating their employment or punishing them when they complain. The laws are put in place to provide wide protection to the worker, and they are working to sort issues concerning the legal framework, as some temporary workers do not qualify for ESA benefits. Along with that, new protection programs should be created. Moreover, they should be influenced to join workers’ unions to express their problems as one group. It is also important to include precarious work in the country’s labor laws and the government should be influenced to do a review on alternative models to the traditional unions to help vulnerable workers in working environments. 

Consequences of failing to follow the regulations 

Governments establish policies and regulations to guide businesses. rules like minimum wage and health requirements are mandatory while other policies influence business differently. As a result, businesses should be flexible enough to respond to dynamics in policies and rules at both local, national, and international levels. Failure to follow the set regulations can lead to the closure of business by government authorities. Also, failure to meet health and environmental standards cannot only lead to the closure of business but also affect the health of the public. Therefore, before starting up a business, investors should ensure they meet the set rules and regulations.


Government regulations on permits and licensing, taxes, consumer advertising, environmental legislation, and employment laws play a critical role in the success of small businesses in the United States. Consistently, even though these regulations are meant to bring about sanity in small business enterprises, they can have negative or positive impacts on the business entities (Strategic Management Insight, 2013). The many licenses required are costly, which makes it hard for many people intending to start a business giving up on their dreams. Also, high taxation collected by different government agencies increases operation costs making it hard for these businesses to attain their bottom lines. Labor laws ensure employees are not discriminated against or exploited. Despite the high cost of regulations, the stringent measures imposed by the government help create a suitable environment for businesses to thrive (Dixon et al., 2019). Therefore, to promote small businesses which are a big source of employment, it is recommended that:

  1. The government should control inflation because the business does not thrive when inflation is high.
  2. High taxes reduce private investment and shrink production of goods and services, thus taxes should reasonable enough to promote investment.
  3. The government should maintain law and order because of lawlessness and disorderly affect businesses negatively. 
  4. The government should foster tax and duty exemptions to promote investment in small businesses.
  5. Government regulations should be effective and promote business in an equal measure.


Autio, E. and Fu, K. (2014). Economic and political institutions and entry into formal and informal entrepreneurship. Asia Pacific Journal of Management, 32(1), pp.67-94.

Chittenden, F., Kauser, S., & Poutziouris, P. (2003). Tax Regulation and Small Business in the USA, UK, Australia and New Zealand. International Small Business Journal: Researching Entrepreneurship, 21(1), 93-115. doi: 10.1177/0266242603021001244

Christopher, D. M. (December 31, 2015). Charting a New Revolution in Equity Crowdfunding: The Rise of State Crowdfunding Regimes in Response to the Inadequacy of Title III of the JOBS Act, 3 J. Marshall Global Mkt. L.J. 135 (2015). John Marshall Global Markets Law Journal, 3, 2.)

Dixon, L., Gates, S., Kapur, K., Seabury, S. and Talley, E. (2019). The Impact of Regulation and Litigation on Small Businesses and Entrepreneurship: An Overview. JSTOR.

Iliev, P., & Vitanova, S. (January 29, 2019). The Effect of the Say-on-Pay Vote in the United States. Management of Science.


Kraja, Y., Osmani, E. and Molla, F. (2014). The Role of the Government Policy for Support the SME-s. Academic Journal of Interdisciplinary Studies.

Nguyen, J., Donohue, K., & Mehrotra, M. (January 01, 2019). Closing a Supplier’s Energy Efficiency Gap Through Assessment Assistance and Procurement Commitment. Management Science, 65, 1, 122-138.

Shields, J. and Shelleman, J. (2015). Integrating sustainability into SMEs’ strategy. Journal of Small Business Strategy, 25(2).

Smallbone, D. and Welter, F. (2001). The Role of Government in SME Development in Transition Economies. International Small Business Journal: Researching Entrepreneurship, 19(4), pp.63-77.

Statistica. M., (2019). Taxation in the United States. New York, NY: Routledge. 

Steiner-Williams, J. (2014). Writing a Research Paper. Carpinteria, Calif.:

The United States. (2018). Growing opportunities for businesses and small farmers in Acadiana: Field Hearing before the Committee on Small Business and Entrepreneurship, United States Senate, One Hundred Fifteenth Congress, first session, August 24, 2017.Vasudeva, G., Alexander, E. A., & Jones, S. L. (June 01, 2015). Institutional Logics and Interorganizational Learning in Technological Arenas: Evidence from Standard-Setting Organizations in the Mobile Handset Industry. Organization Science, 26, 3, 830-846.

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