By: Nicholas Kalina

Introduction

Rural entrepreneurship is essential to developing and sustaining rural communities. Many no longer view “smokestack chasing”—when communities recruit a large employer to the area—as a meaningful way to enhance rural communities.[1] Even though most Americans live in urban cities, rural areas are home to nearly 60 million people.[2] Covering over 97% of the nation’s land and contributing 10% of the Gross Domestic Product (GDP), rural Americans play an important part in our economy.[3] These communities have opportunities to grow and start unique businesses. Rural areas need entrepreneurs because they provide the majority of jobs in their communities.[4] This article analyzes the state of rural entrepreneurship, how COVID-19 has affected rural entrepreneurs, and the legal concerns that many rural entrepreneurs have to navigate.

Rural Entrepreneurship Trends and Demographics

Rural communities have a higher percentage of self-employed individuals relative to urban areas.[5] However, those communities have experienced “brain drain” for many decades—where young residents leave rural areas for urban cities.[6] Because of that, many rural areas have lagged behind urban economic averages in real GDP growth.[7] In 2018 compared to 2008, there were 33% fewer entrepreneurs operating businesses in rural communities throughout America.[8] While brain drain has negatively impacted rural communities, the overall drop in new businesses is worse; fewer entrepreneurs have created fewer businesses since 2008.

Some of these negative trends are explained by the challenges rural entrepreneurs face. For example, rural businesses tend to have limited access to capital.[9] In the five-year period between 2012 and 2017, almost half of the rural counties in America have a lost community bank.[10] Start-up financing through sources such as Venture Capital is less common than simply receiving a loan in rural communities.[11] Other than self-financing or funding from family and friends, local banks are a critical source of capital. Entrepreneurs frequently need loans from community banks to get a business operating, to cover working capital deficiencies, or to simply expand and grow.[12]

Many rural communities also have inconsistent internet connectivity, and some areas lack broadband. Over 39% of rural residents did not have fast internet as of January 2020.[13] Some may believe that agriculture-based businesses do not need broadband, but only one in six businesses in rural communities are farms or related to agriculture.[14] Rural businesses are falling behind if they cannot provide online services, especially during a pandemic when in-person business is less reliable. Analysis suggests rural communities with expanded broadband have had greater economic growth and more entrepreneurs start businesses.[15]

Access to workforce is another challenge in some rural communities.[16] Even if there are people looking for work, finding specialized workers with the right educational background is challenging with fewer people living in the area.

Despite those challenges, rural entrepreneurs also have some advantages over urban cities. For example, rural communities tend to have a more affordable cost of living. Part of that is due to real estate, workers compensation, and other business expenses that are usually cheaper than in urban cities. Rural communities also tend to have strong local support which can help foster entrepreneurship.[17] Notwithstanding these advantages, businesses still face difficulty from the challenges mentioned above.

COVID-19 Effects

All businesses are impacted by the pandemic and face significant challenges ahead. Rural businesses and entrepreneurs may have more difficulty adapting to the pandemic than urban businesses. Rural businesses have to overcome not only the loss of in-person business but, in some cases, the lack of broadband and other challenges as well.[18]

With household spending dropping dramatically, the government has tried to buoy businesses through various stimulus programs. For example, the Paycheck Protection Program (PPP) provides loans to incentivize small businesses to keep employees on staff.[19] Other programs have also helped, but many are calling for further policy assistance.[20]

Regardless of any future governmental assistance, the opportunity to create new, innovative businesses has grown. Contrary to what some may think, entrepreneurship is far from dead. Over 3.2 million people have applied for employer identification numbers during 2020, which is nearly 500,000 more than last year.[21] (It is worth noting that not all businesses are starting in rural communities.) Part of this growth might be attributed to people starting their own business after losing their jobs due to the pandemic. Some rural communities are betting big that COVID’s challenges will lead to a future of opportunity. For example, in Dermott, Arkansas a local leadership team purchased buildings and started an entrepreneurial hub.[22] This supportive environment helps entrepreneurs spring their ideas into action.

[23]

Even though more people are starting businesses, many of them may not succeed. Small business revenue is down nearly 21% from January.[24] Roughly 22% of small businesses were inactive in April; even after some reopening, the month of May was well below pre-pandemic levels too.[25] As another wave of COVID-19 hits America, entrepreneurs are going to have to withstand more uncertainty. It is possible that more government assistance could come, but if it is similar to the PPP, it may be less help than intended. As noted above, rural communities have lost community banks and that has made accessing government relief more difficult. The PPP harnessed the banking sector to deliver relief to businesses. In addition, COVID-19 is progressing in rural communities. “Red-zone counties”—counties with at least 100 new infections in a week per 100,000 residents—are disproportionately located in rural areas. Around 69% of rural counties compared to 54% of urban counties are considered “red-zone counties” as of October.[26]

The COVID-19 pandemic has exacerbated the difficult circumstances many small businesses face in rural communities. The U.S. may require structural change to federal and state policy to develop rural opportunities. One example of such change is seen in Michigan. The state has increased assistance for communities, small businesses, and start-ups impacted by COVID-19 through the Michigan Strategic Fund.[27] With over a quarter of US counties still not economically recovered from pre-2008 levels, the pandemic could widen the gap even further if other similar actions are not taken.[28]

Rural Entrepreneurship Legal Concerns

One important piece of any community is the legal services available to it. Many journalists, scholars, and others have written about the issues of unequal access to legal services in rural communities.[29] This so-called “access gap” is as critical to the legal needs of entrepreneurs as it is to legal needs of the community generally. To create entrepreneurial ecosystems where businesses thrive, rural America needs access to lawyers.

Entrepreneurs generally need help with various legal matters when operating a business. First, they need to obtain a business license and potentially establish an entity. Then, as the business expands and hires employees, it needs to comply with numerous rules and regulations related to things such as paying FICA taxes, contributing to unemployment insurance systems, and more. Intellectual property and funding concerns are also likely areas that require legal assistance. Other, more specific, regulation like Truth in Advertising and Marketing can apply if the entrepreneur advertises. These examples highlight the need for legal assistance, but fewer and fewer lawyers work in rural communities to counsel on the matters.[30]

One potential source of legal assistance is free legal clinics such as ones provided by various law schools. The University of Wisconsin Law School has a clinic that serves local entrepreneurs outside of the major urban cities of Wisconsin. While these services are free and helpful, they can only serve as part of the long-term solution due to limited resources.

Growth in online legal service providers, like LegalZoom, could help mitigate the access gap in these communities, too. The COVID-19 pandemic has amplified the need for online forms of legal work due to restricted in-person services. However, LegalZoom cannot replace the importance of person-to-person, customized legal services that might come otherwise. Businesses located in rural communities with less reliable internet connectivity may limit online providers’ effectiveness as well.

It is also challenging for lawyers to start their own firms in rural communities. Lawyers need to build a book of business, develop their own infrastructure to protect client information, provide competent service, and overcome other difficulties along the way. For those reasons, a more likely solution is expanding the reach of urban lawyers into rural areas in their jurisdictions.[31] While this type of lawyering would also rely on technology, the attorneys could make in-person visits or connect over the phone as well. If attorneys can immerse themselves in the local culture, trust will build and opportunities will grow. Lawyers who invest in rural communities may find the return on investment is worth their time.

Closing

Rural America needs to adjust to expand its entrepreneurial ecosystem. Some of the change needs to come from federal and state policy that is failing rural communities. Lawyers also have an important role to play. It is difficult for businesses to navigate legal complexities and grow without legal assistance. Creating strong rural entrepreneurs is also important to a strong American economy. With around 20% of the population, 10% of the Gross Domestic Product, and 97% of the land, these communities are instrumental to our growth as a nation.[32]

 

[1] https://www.thirdway.org/report/promoting-rural-entrepreneurship-and-rural-economic-development

[2] https://www.census.gov/newsroom/press-releases/2016/cb16-210.html

[3] Id. https://www.americanprogress.org/issues/economy/reports/2019/07/17/471877/redefining-rural-america/

[4] https://www.brookings.edu/blog/the-avenue/2020/08/11/two-local-leaders-discuss-how-smarter-federal-policy-can-save-rural-america-during-covid-19/

[5] https://www.score.org/resource/infographic-rural-entrepreneurship

[6] https://www.minneapolisfed.org/article/2001/entrepreneurship-in-rural-communities-an-emerging-strategy-presents-opportunities-and-challenges

[7] https://www.stlouisfed.org/on-the-economy/2019/july/looking-urban-rural-divide-economic-growth

[8] https://www.brookings.edu/blog/the-avenue/2020/08/11/two-local-leaders-discuss-how-smarter-federal-policy-can-save-rural-america-during-covid-19/

[9] https://www.brookings.edu/blog/the-avenue/2020/08/11/two-local-leaders-discuss-how-smarter-federal-policy-can-save-rural-america-during-covid-19/

[10] Id.

[11] https://vc-list.com/startup-capital-rural-entrepreneurs/

[12] https://www.baylor.edu/mediacommunications/news.php?action=story&story=193701

[13] https://www.brookings.edu/blog/the-avenue/2020/08/11/two-local-leaders-discuss-how-smarter-federal-policy-can-save-rural-america-during-covid-19/

[14] https://vc-list.com/startup-capital-rural-entrepreneurs/

[15] https://www.ers.usda.gov/webdocs/publications/46200/9335_err78_1_.pdf

[16] https://www.score.org/resource/infographic-rural-entrepreneurship

[17] https://www.forbes.com/sites/nextavenue/2020/02/14/rural-entrepreneurs-are-finding-success-away-from-big-cities/?sh=626c6e2456a1

[18] https://www.peoriapublicradio.org/post/rural-america-feeling-pandemic-pain#stream/0

[19] https://www.sba.gov/funding-programs/loans/coronavirus-relief-options

[20] https://www.americanprogress.org/issues/economy/reports/2020/07/27/488129/congress-must-help-rural-america-respond-coronavirus/

[21] https://www.wsj.com/articles/is-it-insane-to-start-a-business-during-coronavirus-millions-of-americans-dont-think-so-11601092841?mod=hp_lista_pos1&utm_source=morning_brew

[22] https://www.ruralrise.org/covid-19-rural-americas-opportunity/

[23] https://www.instagram.com/p/CGaQwKBgNRy/?igshid=s1ujp0m3vzte

[24] https://www.wsj.com/articles/is-it-insane-to-start-a-business-during-coronavirus-millions-of-americans-dont-think-so-11601092841?mod=hp_lista_pos1&utm_source=morning_brew

[25] https://www.nber.org/papers/w27462

[26] https://dailyyonder.com/tag/redzone/; https://www.americanprogress.org/issues/economy/reports/2020/10/28/492376/rural-america-forgotten-coronavirus-crisis/

[27] https://www.michigan.gov/coronavirus/0,9753,7-406-98163-525780–,00.html

[28] https://www.brookings.edu/blog/the-avenue/2020/08/11/two-local-leaders-discuss-how-smarter-federal-policy-can-save-rural-america-during-covid-19/

[29] https://nysba.org/coronavirus-highlights-unequal-access-to-legal-services-in-rural-communities/

[30] https://www.attorneyatwork.com/representing-rural-clients-from-a-big-city-office-think-beyond-technology/

[31] https://www.attorneyatwork.com/representing-rural-clients-from-a-big-city-office-think-beyond-technology/

[32] https://www.americanprogress.org/issues/economy/reports/2019/07/17/471877/redefining-rural-america/