ActSeed is for Entrepreneurs and Startups

In recent months, ActSeed has covered a range of topics entrepreneurs may need help understanding, including health care laws and new insurance mandates. Tax loopholes and small business incentives are also increasingly presenting challenges, as Juliana Davies explains below.

Ms. Davies is a business education writer who focuses on such things as what a top online MBA is worth. Her expertise in US tax policy and enterprise law have helped many new business school graduates get off on the right foot.

In the corporate world, large companies are often touted as “job creators.” However, experts have recently been calling this assertion into question, since small startups and emerging firms are often far more instrumental in filling new positions with qualified employees, particularly during hard times. Due to lopsided corporate policies that tend to favor large businesses, smaller companies must adopt various strategies for succeeding within the current market.

An April 2012 article by The Nation reported that many current business policies do not take company size and generated wealth into account – and as a result, wealthy corporations can often receive the same tax benefits as smaller businesses. One example is the research and experimentation tax credit first implemented by Congress in 1981, which initially targeted the economic recession at that time. However, the credit’s structure allowed large companies to be compensated for R&D projects that were well within their budget. Boeing, for instance, received a credit of $137 million last year – despite only paying federal income taxes once in the last nine years. Another company that has exploited US tax policies is Bechtel, one of the world’s largest telecommunications companies. Despite annual revenue of roughly $33 billion and a workforce of more than 50,000 employees, the company has remained family-run and retained less than 100 shareholders. This qualifies Bechtel as an “S Corporation,” a title that relieves the firm of paying federal income taxes.

Some other unfair policies concern interest generated overseas. While tax law states that interest-generated income earned anywhere in the world is taxable in the United States, companies like GE have circumvented this statute by using an “active financing exception.” This rule states that businesses with captive finance companies in other countries can exclude from their tax reports interest generated by these subsidiaries. Other companies, such as Pfizer, have exploited legal loopholes by building facilities and registering patents in overseas “tax havens” such as Luxembourg and Ireland. At the same time, Pfizer incurs most of its research and development, manufacturing and advertising expenses on American soil. This has allowed the company (the world’s largest pharmaceutical manufacturer) to declare a loss for the last four years – and receive a substantial amount of monetary compensation from the US government.

Though these policies put smaller firms at a strong disadvantage, experts say they can employ certain strategies to navigate the inherently unfair corporate structure. Forbes contributor John Greathouse encourages startups to think unconventionally when it comes to business strategy. “[Implement] a bold and unpredictable go-to-market strategy and [modify] it as soon as your competitors believe they have you figured out,” he wrote. “You can also keep your competitors off-balance by introducing new products into new and unexpected markets, distributing existing products via new channels and serving novel customer segments.” These efforts, he says, will prevent competitors from deciphering – and eventually, emulating – the startup’s strategies.

Fast Company contributor Aaron Shapiro urges small companies to “borrow from big businesses” using various strategies that have historically proven successful. First, he urges startups to focus their energy on “being the best at one very particular thing”; this mindset allows for organic growth through customer loyalty and word-of-mouth. He also notes that, while user experience is key to building a successful brand, companies should also establish a firm strategy for generating revenue in the early stages of development. And while some smaller firms are hesitant to institute bureaucracy at the workplace, he explains that “the b-word” is often seen as a benchmark of success for large companies – and such a system provides structure and reinforces company expectations for all employees.

While various policies of the corporate world may benefit large companies moreso than small ones, experts agree that fledgling businesses can overcome the disparities through streamlined structure and innovative thinking. These are the companies that will most positively impact job creation in the United States – but until more balanced policies are adopted, burgeoning firms must implement alternative strategies for success.

Julianna Davies is a writer and researcher for MBAOnline.com.