Rules, Not Taxes, Are Crushing Small Businesses — And Shifting Power to the Big Players

Small businesses spend more per employee on compliance than their larger competitors, navigating layers of regulatory obligations that increasingly favor scale over innovation. As entrepreneurs opt out of starting ventures and established firms dominate industries, America’s regulatory landscape may be quietly reshaping who gets to compete.

The small things add up. Compliance—taxes, record-keeping, permits—often receives less attention than taxes or inflation in public debates, but it’s reshaping the economy in ways too subtle to headline yet too consequential to ignore. According to the U.S. Chamber of Commerce, 51% of small businesses say navigating regulatory requirements is actively hindering their growth, with nearly 70% reporting they spend more per employee on compliance than larger firms. This quiet imbalance is accumulating into a larger question: Does America’s regulatory approach effectively protect the public interest—or merely favor those big enough to absorb the costs?

Karen Kerrigan, President of the Small Business & Entrepreneurship Council, notes that for small operators, complexity itself is a barrier to entry. “Most small businesses generally do not have the resources and expertise to navigate complex compliance issues. The cost is in both time and money, and more of each spent in compliance means less of these valuable resources going into building the businesses and growth,” Kerrigan said. She explained that while certain industries, like manufacturing or construction, face specific challenges tied to environmental regulations, even startups entering low-capital sectors feel the pressure. The burden comes from a mix of overlapping federal, state, and local rules.

The implications are clear: compliance does more than cost money. It shapes competition. Kerrigan describes this disparity succinctly: “Excessive regulation undermines competition in the market by undermining small businesses and the new startups that keep industries vibrant and competitive.”

But what does this reality look like on the ground?

Philip Freeman, founder of Murphy’s Naturals in Raleigh, N.C., faced regulatory delays when planning to expand his workspace. Permit lead times grew so long that he canceled the project. "The delays make the expansion no longer a good return on investment. While we saved money by canceling the construction, some contractors missed out on the construction project that would have been good for our local economy," Freeman said. While larger companies can roll compliance barriers into long-term plans, for small operators like Freeman, each slowdown or bureaucratic hurdle has immediate ROI implications that ripple outward to local contractors and suppliers.

If increasing regulatory costs are quietly favoring incumbents, the result could be a systemic shift in who holds economic power. When asked whether the regulatory burden deters new entrepreneurs, Kerrigan was blunt: “I definitely believe it is a barrier.” She pointed out that while over 5 million Americans apply for an Employer Identification Number (EIN) annually, only 10% to 12% of those applications lead to an operating business. Kerrigan partly attributes this gap to compliance challenges: “For those with limited resources—access to capital—the initial burden and ongoing burdens once the business is operating could be too much or scare individuals away from starting a new business.”

What’s at risk isn’t just individual aspirations but larger economic dynamics. Suzanne Clark, CEO of the U.S. Chamber of Commerce, frames the question in systemic terms: "Unfortunately, in many cases, that is not the reality today, and many Americans do not feel like this economy is working for them... We need to get back to growth."

Growth alone doesn’t solve the issue, though. Small operators aren’t just fighting macro forces like inflation—they’re fighting systems designed for larger players. Building permits in Freeman’s example, labor rules, tax compliance, and environmental reviews all make baseline operations disproportionately complex for smaller teams without legal advisors or compliance departments. With larger c“Unfortunately, in many cases, that is not the reality today, and many Americans do not feel like this economy is working for them. To create the future we want and the next generation deserves, we need to get back to growth.” with caveats. While 46% of small businesses plan to increase investment and 41% anticipate hiring next year, these decisions often sidestep expansion-heavy sectors like construction or manufacturing where permits and zoning regulations escalate complexity. And while entrepreneurs exploring storefronts or restaurants remain enthusiastic, Kerrigan highlights local zoning rules as another structural barrier—the kind that dissuades promising ideas from ever reaching the market.

Policymakers face a delicate balance: regulations exist to protect people, ensure accountability, and guide long-term industry norms, but their downstream impacts rarely receive equal scrutiny. Kerrigan urges governments at all levels to engage directly with the small business community. “At all levels of government, politicians and policymakers should first understand the downstream impact of existing regulations and new ones they may be considering. This can be done through cost-benefit analysis and study, and actually by talking to small business owners,” she suggested.

Going forward, several unanswered questions remain. What happens if regulatory accumulation continues to favor larger firms? Does America’s record-breaking surge in EIN applications mean the entrepreneurial spirit endures—or that its barriers are rising just as high? And what, if any, redesign in compliance structures would genuinely level the playing field?

The stakes transcend business. Without reforms, the balance of economic power may tilt further toward incumbents and away from the local dynamism that has historically defined the American economy. For now, small operators across industries remain caught between ambition and layers of rules, questioning whether compliance is protecting markets—or reshaping them instead.