Small business


Small businesses are types of corporations, partnerships, or sole proprietorships which have a small number of employees and/or less annual revenue than a regular-sized business or corporation. Businesses are defined as "small" in terms of being able to apply for government support and qualify for preferential tax policy. The qualifications vary depending on the country and industry. Small businesses range from fifteen employees under the Australian Fair Work Act 2009, fifty employees according to the definition used by the European Union, and fewer than five hundred employees to qualify for many U.S. Small Business Administration programs. While small businesses can be classified according to other methods, such as annual revenues, shipments, sales, assets, annual gross, net revenue, net profits, the number of employees is one of the most widely used measures.
Small businesses in many countries include service or retail operations such as convenience stores or tradespeople. Some professionals operate as small businesses, such as lawyers, accountants, or medical doctors. Small businesses vary a great deal in terms of size, revenues, and regulatory authorization, both within a country and from country to country. Some small businesses, such as a home accounting business, may only require a business license. On the other hand, other small businesses, such as day cares, retirement homes, and restaurants serving liquor are more heavily regulated and may require inspection and certification from various government authorities.

Characteristics

Researchers and analysts of small or owner-managed businesses generally behave as if nominal organizational forms, and the consequent legal and accounting boundaries of owner-managed firms are consistently meaningful. However, owner-managers often do not distinguish between their personal and business interests. Lenders also often skirt organizational boundaries by seeking personal guarantees or accepting privately held assets as collateral. Because of this behavior, researchers and analysts may wish to be cautious in assessing the organizational types and implied boundaries relating to owner-managed firms. This includes the analysis of traditional accounting disclosures and studies that treat the firm as defined by a formal organizational structure.

Concepts of small business, self-employment, entrepreneurship, and startup

The concepts of small business, self-employment, entrepreneurship, and startup overlap but carry important distinctions. These four concepts are often conflated. Their key differences can be summarized as:
  • self-employment: an organization created primarily to provide income to the founders, i.e. sole proprietor operations.
  • entrepreneurship: all new organizations.
  • startup: a new organization created to grow.
  • small business: an organization that is small and may or may not have the intention to grow.
Many small businesses are sole proprietor operations consisting only of the owner, but many have additional employees. Some small businesses that offer a product, process or service, do not have growth as their primary objective. In contrast, a business that is created to become a big firm is known as a startup. Startups aim for growth and often offer an innovative product, process, or service. The entrepreneurs of startups typically aim to scale up the company by adding employees, seeking international sales, and so on, a process which is often but not always financed by venture capital and angel investments. Successful entrepreneurs have the ability to lead a business in a positive direction by proper planning, adapting to changing environments, and understand their own strengths and weakness. Spectacular success stories stem from startups that expanded in growth. Examples would be Microsoft, Genentech, and Federal Express which all embody the sense of new venture creation on small businesses.
Self-employment provides work primarily for the founders. Entrepreneurship refers to all new businesses, including self-employment and businesses that never intend to grow big or become registered, but startups refer to new businesses that intend to grow beyond the founders, to have employees, and grow large.

Size definitions

The legal definition of "small business" varies by country and by industry. In addition to the number of employees, methods used to classify small companies include annual sales, the value of assets and net profit, alone or as a combination of factors.
  • In India, all the manufacturing and service enterprises having investment "Not more than Rs 10 crore" and Annual Turnover "not more than Rs 50 crore" come under this category.
  • In the United States, the Small Business Administration establishes small business size standards on an industry-by-industry basis but generally specifies a small business as having fewer than 500 employees for manufacturing businesses and less than $7.5 million in annual receipts for most non-manufacturing businesses. The definition can vary by circumstance—for example, a small business having fewer than 25 full-time equivalent employees with average annual wages below $50,000 qualifies for a tax credit under the health care reform bill Patient Protection and Affordable Care Act. By comparison, a medium-sized business or mid-sized business has fewer than 500 employees.
  • The European Union generally defines a small business as one that has fewer than fifty employees and either turnover or balance sheet less than €10 m. but the European Commission is undertaking a review of this definition. By comparison, a medium-sized business has fewer than 250 employees and either turnover less than €50 m. or balance sheet less than €43 m.
  • In Australia, a small business is defined by the Fair Work Act 2009 as one with fewer than 15 employees, although the Australian Bureau of Statistics uses less than 20 employees as its threshold. By comparison, a medium-sized business or mid-sized business has fewer than two hundred employees.
  • In South Africa, the National Small Business Amendment Act defines businesses in a variety of ways using five categories previously established by the National Small Business Act, namely, standard industrial sector and subsector classification, size of class, equivalent of paid employees, turnover and asset value excluding fixed property.
Small businesses usually do not dominate their field.
The following table serves as a guide to business size nomenclature.
SizeAUSUSCANEU
Minute/micro1–21–61–4<10
Small<15<500<100<50
Medium<200<500<500<250
Large<500<1000>500<1000
Enterprise>500>1000N/A>1000

  • Most cells reflect sizes not defined in legislation.
  • Some definitions are multi-parameter, e.g., by industry, revenue, or market share.

    Demographics

In 2016 a study that examined the demographic of small business owners was published. The study showed that the median American small business owners were above the age of 50. The ages were distributed as 51% over 50 years old, 33% between the ages of 35 and 49, and 16% being under the age of 35. As for sex: 55% were owned by males, 36% by females, and 9% being equal ownership of both males and females. As for race: 72% were white/Caucasian, 13.5% were Latinos, 6.3% were African American, 6.2% were Asian, and 2% as other. As for educational background: 39% had obtained a bachelor's degree or higher, 33% had some college background, and 28% received at least a high school diploma.
The United States census data for the years 2014 and 2015 shows the women's ownership share of small businesses by firm size. The data explains percentages owned by women along with the number of employees including the owner. Generally, the smaller the business, the more likely it to be owned by a woman. The data shows that about 22% of small businesses with 100-500 employees were owned by women, a percentage that rises the smaller the business. 41% of businesses with just 2-4 employees were run by women, and in businesses with just one person, that person was a woman in 51% of cases.

Franchise businesses

is a way for small business owners to benefit from the economies of scale of the big corporation. McDonald's and Subway are examples of a franchise. The small business owner can leverage a strong brand name and purchasing power of the larger company while keeping their own investment affordable. However, some franchisees conclude that they suffer the "worst of both worlds" feeling they are too restricted by corporate mandates and lack true independence. It is an assumption that small business is just franchisees, but the truth is many franchisers are also small businesses. Although considered to be a successful way of doing business, literature has proved that there is a high failure rate in franchising as well, especially in the UK, where research indicates that out of 1658 franchising companies operating in 1984, only 601 remained in 1998, a mere 36%.

Retailers' cooperative

A retailers' cooperative is a type of cooperative that employs economies of scale on behalf of its retailer members. Retailers' cooperatives use their purchasing power to acquire discounts from manufacturers and often share marketing expenses. They are often recognized as "local groups" because they own their own stores within the community. It is common for locally owned grocery stores, hardware stores, and pharmacies to participate in retailers' cooperatives. Ace Hardware, True Value, and NAPA are examples of a retailers' cooperative. Retail cooperatives allow consumers to supply their own earnings and gain bargaining power outside of the business sector. Retail cooperatives mainly reside within small communities where local businesses are often shut down.