What is a small business?
From a retired teacher wondering how to start a tutoring business to a website developer hoping to break into consulting, a lot of people dream of becoming a small business owner. But what exactly makes something a “small business”?
The simplest way to define a small business is as a corporation, sole proprietorship, or partnership that has fewer employees and/or less yearly revenue than a regular-sized business or corporation. Small businesses can be classified in a number of ways: by sales, revenue, shipments, net revenues, or net profits. However, the most common way is by number of employees–one of the metrics used by the Small Business Administration (SBA). Their definition of small business is largely determined by numbers.
The SBA definition of a small business
The Small Business Administration, or SBA, is a government agency that exists to support entrepreneurs and small businesses. They measure a small business by industry, looking at both annual revenue and number of employees. Qualifying as a small business through the SBA offers opportunities for government resources. Besides the numbers, the SBA definition of small business includes:
A business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor.
What are the 4 small business types?
To qualify as a small business, a company may operate as a sole proprietorship, partnership, LLC, or corporation. Let’s take a closer look at what these four small business structures entail.
A sole proprietorship is the most common, and the most simple, business structure. There is no legal distinction between you and your business. As a business owner you receive all profits and are on the hook for all debts, losses, and liabilities.
There are no formalities involved with creating a sole proprietorship. You have this status simply by engaging in business activities. This includes things like freelance writing, photography, or pet care. You are, however, responsible for obtaining all licenses and permits required for your state and locality.
Pros of a sole proprietorship:
- Easiest and least expensive business structure to form
- Simple tax preparation, and lowest tax rate for a business
- Complete control over decision making
Cons of a sole proprietorship:
- Can have difficulty raising money (limited investor opportunity)
- While the owner has all of the control, they also have all of the burden of whether or not the company will succeed
- The owner can be held liable for all debts and liabilities
A partnership is when two or more people decide to go into trade or business together. Each person contributes toward the business, whether it be money, property, skill, or labor, and they also share in the profits or losses of the business.
Pros of a partnership:
- Simple to form–all that’s required is an oral or written agreement
- More resources, as there are more individuals to contribute
- Risk is shared among more people
- Partners can share a variety of skills, which may benefit the business
Cons of a partnership:
- There is the risk of disagreement among partners
- Like a sole proprietorship, owners are fully responsible for all debts and liabilities
Limited Liability Corporation (LLC)
An LLC is a business structure found in the United States that protects owners from personal responsibility for the business’s debts and liabilities. It’s rather like a combination of a sole proprietorship or partnership and a corporation. Anyone business can register as an LLC, except for banks and insurance companies.
Pros of an LLC:
- Owners cannot be held personally responsible for debts and liabilities
- Profits are taxed as personal income, avoiding double taxation as the company and individual owners
Cons of an LLC:
- LLCs are not suitable for public trading, if this is an eventual goal for your company
- In some states, an LLC must be dissolved upon death or bankruptcy of a member
A corporation is a business entity that is owned by shareholders and run by a board of directors that oversees activities. A corporation is legally separate and distinct from its owners. In fact, it’s considered an individual in many ways. A corporation can loan and borrow money, enter contracts, sue and be sued, own assets, and pay taxes. There are corporations that are businesses (for-profit corporations), as well as non-profit corporations that are formed for charitable, beneficent, or educational purposes.
Pros of a Corporation:
- Owners personal assets are protected
- Far more likely to attract investors
- Owners can offer employees stock options, attracting a higher caliber of employee
Cons of a Corporation:
- Set up and maintenance of a corporation is more complicated, with more moving parts
- Investors will pay more taxes as part of a corporation
- There are more decision-makers, which can lead to disagreement
- Corporations are subject to more government regulations than any of the other business systems
The average number of employees in a small business by industry
The SBA periodically revises and releases a list of standards for consideration as a small business by industry. While some industries are measured by annual revenue, others are determined by number of employees. Here we’ll share a list of some of these industry standards as measured by employee numbers. This is a partial list updated in 2019, you can find the full list here.
- Crude petroleum and natural gas extraction: 1250 employees or less
- Retail bakeries: 500 employees or less
- Commercial bakeries: 1000 employees or less
- Breweries: 1200 employees or less
- Wineries or distilleries: 1000 employees or less
- Commercial printing (except for books and screens): 500 employees or less
- Book printing: 1250 employees or less
- Automobile and other motor vehicle merchant wholesalers: 250 employees or less
- Construction material wholesalers: 100 employees or less
- Sporting and recreation wholesalers: 100 employees or less
- Drug and druggist merchant wholesalers: 250 employees or less
- General line grocery wholesalers: 250 employees or less
- Livestock merchant wholesalers: 100 employees or less
- Book, periodical, and newspaper merchant wholesalers: 200 employees or less
- Wine and distilled alcoholic beverage wholesalers: 250 employees or less
- New car dealers: 200 employees or less
- Air transportation (all types): 1250 employees or less
- Long haul and short line railroads: 1500 employees or less
- Newspaper, periodical, and book publishers: 1,000 employees or less
- Record production and distribution: 250 employees or less
- Environmental remediation services: 750 employees or less
As you can see, the number of employees in small businesses can vary widely depending on the industry. A small business can be a wedding photographer working solo or it can be a record producer employing over a hundred people.
Understanding what constitutes a small business is the first step to launching into the business world. From there, you can create business goals and decide what business structure will work best for your goods or services. The Small Business Association is a great resource for further information on the industry guidelines—especially important to know if you are interested in a more robust business model with a lot of employees.
Another great place to look for everything you need to know about starting a business is the small business blog index at NorthOne, found here. This collection of helpful articles can help answer a lot of the questions you may have before getting started.
Need help separating your business finances from personal finances? NorthOne is a simple and fast Business Deposit Account. We help builders and makers manage their money by making banking effortless.