Down-Sizing the 'Little Guy' Myth in Legal Definitions

Author:Mirit Eyal-Cohen
Position:Assistant Professor of Law, University of Pittsburgh School of Law
Pages:1041-1099
SUMMARY

What is a "small business" in the eyes of the law? There is not one standard definition. Current legal definitions of a firm’s size are inconsistent and overinclusive. They vary from one area of the law to another and within various sections of the same law. They create a skewed picture and result in data distortion that reinforces favoritism toward small entities, as studies on the contribution... (see full summary)

 
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1041
Down-Sizing the “Little Guy” Myth in
Legal Definitions
Mirit Eyal-Cohen
ABSTRACT: What is a “small business” in the eyes of the law? There is not
one standard definition. Current legal definitions of a firm’s size are
inconsistent and overinclusive. They vary from one area of the law to
another and within various sections of the same law. They create a skewed
picture and result in data distortion that reinforces favoritism toward small
entities, as studies on the contribution of small businesses to the economy are
greatly dependent on these studies’ delineation of the term “small.” In this
time of huge deficits and rise in economic inequality, a lot of money is being
spent based on the entrenched belief that small firms are the essence of our
economy, which is not necessarily true. Therefore, this Article argues that the
current focus on size in many legal definitions is a waste of both time and
money.
This Article provides a comprehensive survey of legal definitions of small
entities and the policy considerations that underlie these delineations. This
Article concludes that the historical emphasis on magnitude no longer
functions effectively. Current legal demarcations concentrated on
“smallness” generate undesirable distributional effects, produce inefficient
allocation of government resources, and defeat policy considerations of
promoting entrepreneurship and economic growth. The recent proposal to
integrate the Small Business Administration with other federal commerce
and trade agencies into one super pro-business agency is yet one more ste p
toward this proposed shift from a size-centered to a goal-driven approach.
I. INTRODUCTION .................................................................................... 1043
Assistant Professor of Law, University of Pittsburgh School of Law. I thank Steven
Bank, Ilan Benshalom, Pat Chew, David Herring, Bernard Hibbitts, Eric Jensen, Anthony
Infanti, Assaf Likhovski, Jules Lobel, Orly Lobel, Michael Madison, Lu-In Wang, Rhonda
Wasserman, as well as participants from the Case Western Reserve University School of Law
faculty workshop and the University of Pittsburgh Junior Faculty workshop. A special thanks to
Peter Oh for his valuable advice through the process of writing this Article. I also thank
Associate Director of Public Services at Barco Law Library Marc Silverman and research
assistants Jeremy Rivet and Tara Tighe for their research support. Finally, this Article would not
have been possible without the encouragement of my loving husband, Tamir, to whom this
Article is dedicated.
1042 IOWA LAW REVIEW [Vol. 98:1041
II. POLICY CONSIDERATIONS .................................................................... 1047
A. FREE ENTERPRISE ........................................................................... 1047
B. ENTREPRENEURSHIP ....................................................................... 1051
C. EMPLOYMENT EXPANSION .............................................................. 1057
D. OTHER CONSIDERATIONS ................................................................ 1060
III. CURRENT DEFINITIONS OF “SMALL” .................................................... 1065
A. SECURITIES LAW ............................................................................. 1065
B. HEALTHCARE ................................................................................. 1068
C. LABOR AND EMPLOYMENT .............................................................. 1072
D. PATENT LAW.................................................................................. 1076
E. GOVERNMENT CONTRACTING LAW .................................................. 1078
F. INTERNAL REVENUE CODE .............................................................. 1081
IV. DISAPPROVAL OF CURRENT SIZE CRITERIA .......................................... 1086
A. THE FOCUS ON SIZE DEFEATS OUR POLICY CONSIDERATIONS ............ 1087
B. CURRENT EMPHASIS ON SIZE GENERATES UNDESIRABLE
DISTRIBUTIONAL EFFECTS ............................................................... 1090
C. PRESENT FOCUS ON SIZE CREATES DATA DISTORTION AND
INEFFECTIVE ALLOCATION OF RESOURCES ........................................ 1095
V. CONCLUSION ....................................................................................... 1097
2013] DOWN-SIZING THE “LITTLE GUY” MYTH 1043
I. INTRODUCTION
Small business represents the essence of the free-enterprise system and
the American dream.1 In recent years, there has been a growing interest in
examining the degree to which small businesses contribute to economic
growth.2 Small entities are regarded as the job engine of the U.S. economy
and are viewed as the source of entrepreneurship and innovation.3 In his
2012 State of the Union Address, President Obama stated:
[W]e should support everyone who’s willing to work, and every
risk-taker and entrepreneur who aspires to become the next Steve
Jobs.
After all, innovation is what America has always been about. Most
new jobs are created in start-ups and small businesses. So let’s pass
an agenda that helps them succeed. Tear down regulations that
prevent aspiring entrepreneurs from getting the financing to
grow.4
But just what is a “small” business? Depending on where one looks in
U.S. laws, the definitions vary, and they differ from one section to another.5
During the nineteenth century, a personal relationship between the owners
of a firm and their employees was one of the main characteristics that courts
looked for when identifying an entity as a small business.6 Without a clear
definition, other courts resorted to the “I will know it when I see it”
1. See generally Mirit Eyal-Cohen, Why Is Small Business the Chief Business of Congress?, 43
RUTGERS L.J. 1 (2012) (reviewing at length these justifications and their effect as positive
feedbacks that reinforce the path dependence of small-business preferences, and concluding
that these justifications reflect today’s small-business culture of continuously reinforcin g
glorification of these entities and the expansion of their preferen tial legal treatment).
2. In this Article the term “small business” is used in its singular form to denote the
concept and values attributed to this term, whereas the plural “sma ll businesses” is used when
describing routine actions of small firms.
3. See infra Part II.B.
4. President Barack Obama, State of the Union Address (Jan. 24, 2012), available at
http://www.whitehouse.gov/the-press-office/2012/01/24/remarks-president-state-union-address.
5. See M
ATTHEW KNITTEL ET AL., U.S. DEPT OF THE TREASURY, METHODOLOGY TO
IDENTIFY SMALL BUSIN ESSES AND THEIR OWNERS 2 (2011), available at http://www.treasury.gov/
resource-center/tax-policy/tax-analysis/Documents/OTA-T2011-04-Small-Business-Methodology-
Aug-8-2011.pdf (“[A] consensus does not exist regarding the specific attributes that distinguish
small businesses from other firms.”); Martin A. Sullivan, The Myth of Mom-and-Pop Businesses, TAX
ANALYSTS (Sept. 12, 2011, 9:42 AM), http://www.taxanalysts.com/taxcom/taxblog.nsf/Permalink/
UBEN-8LMHY5?OpenDocument (“What exactly is a small business? There is no one answer.”) ;
infra Part III.
6. See, e.g., Andrews Bros. Co. v. Youngstown Coke Co., 86 F. 585, 591 (6th Cir. 1898)
(“[For] small business corporations, . . . the personnel of the members is a matter of some
importance, and is the only feature which particularly distinguishes these associations from
ordinary corporations.”).

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