Small businesses are the backbone of the economy. There are nearly 32m small businesses in America, representing 99% of all companies.
These small but mighty businesses are also a major source of employment for Americans, and often bring needed services to the communities they are in.
If you’re thinking of starting your own, then it’s time to learn what it means to be a small business and how others have found success.
What is the definition of a small business?
There’s no single definition for a small business. It depends on the “size standards” of the Small Business Administration (SBA), which considers a company’s annual revenue, industry, and the number of employees.
Generally, a small business is a company that’s privately owned by a founder, corporation, partnership, or LLC that employs under 1.5k workers and earns less than $40m in annual sales.
However, many small businesses have fewer than five workers and earn significantly less.
What is considered a small business?
A small business, to most people, is a little-known shop, store, or firm that provides goods or services to the public. Some are run solely by the owner, while others have a dozen or even hundreds of employees.
Examples include mom-and-pop shops, solo entrepreneurs, private law firms, restaurants, and boutique stores.
Roughly 14% of small employer firms choose to remain sole proprietors, which means they’re liable for all business debts. In other words, if they default on a business loan or get sued by a customer, then their personal property (e.g., home, car, bank accounts) is up for grabs.
Others decide to protect their personal assets by structuring their small business as a Limited Liability Company (LLC). This safeguards their personal property from seizure in the event they’re sued or become delinquent on a business debt.
What is considered a small business by the SBA?
The SBA is a federal organization that offers a variety of programs and services to help small businesses start, grow, and succeed. The SBA also determines whether a business is small based on several factors, such as:
- Industry of the business
- Number of employees the business has
- Annual revenue of the company
- If the company is headquartered and operates in America
- Whether the company is a minority in its larger industry
- If the company operates primarily within the US
- Whether the business is for profit
For example, if you’re an iron-ore miner, you can have 750 employees and still qualify as a small business. If you own a used-car dealership, then you can have as many employees as you want, as long as you don’t earn over $27m in annual revenue. However, new-car dealerships can only have up to 200 employees to count as a small business.
What’s considered a small business varies greatly. If you’re looking to get funding from an SBA-backed loan, check the guidelines to ensure your business qualifies.
What size is a small business?
A small business can have one location, several locations, or even a single large headquarters. What determines a business’s size is how many people it employs, its annual revenue, and the industry.
For example, under the SBA, crop farmers don’t have limits to how many people they can employ, but there are revenue caps ($750k). Then, for a chain of retail bakeries to remain “small,” it can’t have more than 500 employees.
The bigger your revenue and employee base becomes, the closer you are to becoming a medium or large business.
What is the average revenue of a small business?
The average annual revenue of a US small business without employees is $46,978. There were ~25.7 million non-employer companies in 2017, making up the majority of all small businesses.
Many of these non-employer companies are family-run or partnerships.
According to a survey by The Small Business Credit Survey (SBCS), 71% of non-employer firms earned $100k or less (compared to 18% of employer firms).
Becoming a small-business owner
There’s no one path to becoming a small-business owner. Some purposely join this journey, while others stumble into it accidentally.
That was the case for Paige Arnof-Fenn, who founded marketing consulting firm Mavens & Moguls after she was laid off post 9/11.
“I didn’t plan on starting a company — I always wanted to work for a large multinational business and be a Fortune 500 CEO,” says Arnof-Fenn. “When I was a student, leaders like Meg Whitman and Ursula Burns were my role models.”
Her career began in the ’80s on Wall Street, where she worked with Procter & Gamble and Coca-Cola, and was the head of marketing at several startups. After her extensive experience in the industry, it made sense for her to venture into opening her own marketing shop.
For Robin Warren, founder of Cherry Wood Software, the desire for financial control and the challenge of entrepreneurship drove him to open his own business.
In January 2015, he quit his job with 12 months of savings and got started. He came up with various ideas, tried to validate them, and moved on if there was no interest from potential users. Eventually, he started building add-ons for Trello, a popular project management platform..
“I had some experience in that area and felt I understood the problem,” says Warren. “I continued to build the solution, but growth was slow, hitting about $1k monthly recurring revenue (MRR) by the end of the year.”
At this point, he was running out of savings and looking for a job. Fortuitously, Trello launched its power-up directory, which allowed users to discover software add-ons. Cherry Wood was included in the directory, and the exposure helped push its growth over the edge.
By spring of the second year, Warren was earning enough to cover his family living costs for the first time; the company has been growing steadily ever since.
Pros and cons of running a small business
Being your own boss comes with its ups and downs. Remaining steady through the turbulence is key to making it work.
“SMBs are more nimble and can respond quickly to consumer needs and get products/services to market fast,” says Arnof-Fenn. “There’s also more financial upside and career opportunity for growth in SMBs at a younger age.”
Several business owners mention the following as the common pros and cons that come with being an entrepreneur.
Pros of owning a small business:
- If you don’t like a process or dynamic with your team, you have the power to create change
- You have complete control over your calendar
- It’s easy to delegate tasks like bookkeeping and social media management to promote growth (if you can build clear systems and processes to follow)
- Potential financial rewards can be higher and faster to obtain than a salaried career
Cons of owning a small business:
- Working with clients who aren’t aligned with your values (because you need the money)
- Not knowing where to invest your time
- Allowing work-life balance to dissipate and cause burnout (especially at the start when you work longer hours)
- The risk of losing everything if you fail
- Having to manage all aspects of your business yourself
Tips for new small-business owners
Save extra money as a cushion. Hire the right help. Validate your business idea first. These are some of the tips that can help new entrepreneurs succeed in their small ventures.
Another tip from Paige Arnof-Fenn is to not waste your money on fancy brochures, letterheads, and business cards.
“Until you know your business is launched I’d say put your budget into things that fill your pipeline with customers,” advises Arnof-Fenn. “Getting your domain name and website up and running is key.”
She also recommends using online stationery for proposals and invoices, and making downloadable materials as leave-behinds for people looking for more information.
“I know business owners who spent thousands on these things [brochures, business cards, etc.] and found it was a waste,” says Arnof-Fenn. “You need to look professional and be taken seriously, but embossed paper with watermarks and heavy card stock won’t accelerate your sales cycle. Find those reference customers quickly, and use them to get testimonials and referrals.”