THE IMPACT OF REGULATORY COMPLIANCE COSTS ON SMALL BUSINESS PROFITABILITY

Abstract

Small businesses serve as the backbone of emerging economies, generating employment, fostering innovation, and contributing significantly to GDP. However, they often face disproportionate challenges in managing regulatory compliance requirements compared to larger firms. Compliance with taxation, labor laws, environmental regulations, and reporting standards imposes substantial direct and indirect costs, which can erode profit margins and hinder growth potential. This paper reviews the impact of regulatory compliance costs on small business profitability, focusing on three dimensions: the financial burden of compliance, operational inefficiencies caused by regulatory complexity, and strategic adaptations by firms to mitigate these costs. Graphical illustrations compare profitability outcomes between firms with high versus low compliance costs, and a comparative table highlights best practices and gaps in regulatory management. The findings indicate that while compliance ensures legitimacy and reduces risk, excessive costs disproportionately affect small enterprises, curbing their competitiveness and survival. The study concludes by recommending simplified regulatory frameworks, digitalization of compliance processes, and government support mechanisms to ease the burden on small businesses.