At one time, high school and college graduates accepted jobs with governments, large corporations or industrial businesses and worked in those occupations for dozens of years until they retired. But thanks to technology, entrepreneurs can start their own businesses, gradually growing them until they are thriving corporations. With more than 28.8 million small businesses in operation in the U.S., small-scale enterprises have become an important force in the overall economy.
What Is Small-Scale Business?
The word small can be subjective. A large corporation employing millions of people worldwide might see a local company with 20,000 employees as small. Your business’ size is defined by the number of people you employ, the money you bring in and the industry in which you operate. To address the fact that size definitions are complicated, the Small Business Administration has developed strict standards for defining whether a business qualifies as a small-scale enterprise.
In many industries, businesses can have hundreds of workers on salary before leaving the small-business category. A manufacturer can have between 500 and 1,500 employees, depending on the type of company, and still be classified as small. But employee caps for retailers are between 100 and 500 employees or $7.5 million in receipts each year. Within those standards are subindustries, though, so it’s important that a company look at the SBA’s guidelines when determining if they qualify as a small business. The SBA also has a Size Standards Tool that walks a business through a series of questions to determine whether it qualifies as small.
Role of Small-Scale Enterprises in Economic Development
America’s 28.8 million small businesses make a sizable contribution to the economy each year. They employ more than 56.8 million people, many of whom have the income necessary to purchase housing and other items they want. When local residents hear that a large corporation is coming to town, they usually get excited about all the jobs it will bring. However, small businesses move in much more quietly, offer jobs to a few people, then gradually grow until hundreds are on the payroll. The realtors, law offices, dental practices and many other businesses operating in your town help keep it going. And that doesn't even include the many bakeries, doughnut shops and boutiques scattered around town.
Small businesses can be even more powerful in developing economies, creating jobs that bring in money for residents who then spend that money at other local businesses. Outsourcing has helped with this, especially with the emergence of impact sourcing, where businesses in developed areas of the world recruit and train talent in remote regions, equipping them with the skills necessary to earn money. This global outreach also gives communities the tools they need to solve serious issues like lack of access to clean drinking water.
What Is Large-Scale Enterprise?
As with small-scale enterprises, large businesses can be classified as such based on the number of employees, annual revenue and the industry in which they operate. Although there is no official definition of a large business, simply use the cutoff for small businesses as a measuring stick. In other words, if your industry is officially considered a small business if you have 1,500 employees or fewer, you may assume that having 1,501 workers qualifies you as large.
There’s a reason for not having an official cutoff. The government needs to define small businesses because the SBA offers assistance to companies based on size. Between a small-scale enterprise and a large-scale enterprise is the midsized business, also called midmarket. Midsized companies are beyond the startup stage, operating with only a few employees, but they haven’t yet achieved the status of a large corporation with hundreds of thousands of workers around the globe. You may not classify yourself as a large-scale enterprise until an investor or shareholder defines you as such.
Help for Small-Scale Businesses
For businesses that qualify as small, there are programs available to support them. The SBA is one of the biggest, with plenty of advice on its website. The Small Business Development Centers located across the country are available for entrepreneurs to visit for advice, to get help building business plans, and to gain access to local resources and networking opportunities. SCORE also offers advice and networking opportunities to small-business owners.
There are also special grants distributed to small-business owners every year. Many are specific to either the type of work you do or require you to fit a certain demographic profile. The Small Business Innovation Research Program, for example, issues grants to businesses involved in conducting research with commercial potential. It’s important to note that when you accept a grant, you’ll be required to use the money for a designated purpose. If you need money to go toward general business expenses, there are many small-business loan programs that can help.
Do All Businesses Have to Follow the Same Laws?
Regulations apply to all businesses, whether they have one employee or 100,000. You can’t take money from customers without providing a product, for instance, or you’ll quickly be reported to your local attorney general or the Better Business Bureau. You’ll have to pay employees at least the local minimum wage and have the required licenses for the type of company you’re operating. You’ll also be required to pay sales taxes where applicable on any products you sell and, in some states, on the services you provide.
In some cases, though, being a small business is to your advantage. The mandate that required businesses to provide health insurance exempted companies with fewer than 50 employees. Age and disability laws don’t apply to businesses with an extremely small number of employees. The amount you sell can also exempt you from certain requirements. Food businesses that sell less than 100,000 units per year don’t have the same labeling requirements as larger companies, but they must get an exemption from the FDA to skip that step.
Types of Small-Scale Enterprises
Local mom and pop shops get all the press, but small enterprises include a wide range of business types. An accountant can start a small business in the comfort of her own home, using the laptop and internet connection she already has. To move from freelancer to business owner, though, she’ll need to choose a business name and file for a license from the state or local agencies. Service-based businesses like marketing and graphic design firms often begin without paying a lease for space, then gradually add staff as they grow.
In addition to service-based businesses, there are many small restaurants and retailers that operate more visibly in a community. Additionally, small retailers can operate an online storefront, using third-party fulfillment services to store products and manage shipments. Online marketplaces like Shopify have made it easier than ever for an entrepreneur to open a small business and grow it at minimal expense.
Can Anyone Start a Small-Scale Business?
Although anyone can start a business, not everyone has what it takes to turn one into a success. Before you even get started, conduct thorough research to ensure that you fully know your target market. You should also have a business plan and a full understanding of how much money you’ll need to launch your business. Be aware of all of the legal requirements attached to an enterprise of your type to avoid getting into regulatory issues.
A bank loan can be a way to pay for earlier expenses, but it can also get you into financial trouble. Since your business won’t have enough assets yet to be used as collateral, many lenders will require you to use your home as collateral, which can put your family at risk. One alternative is to find an investor to put money into your venture in exchange for equity in the company. You may also be able to use a crowdfunding platform like Kickstarter to get the funding you need while also generating buzz about what you’re offering.
Risks of Small-Scale Enterprises
With so much at stake, it’s important to realize the many risks that small businesses face. By being aware of these dangers, you can put risk management measures in place that will increase your chances of long-term success. These risks fall into several major categories, both internal and external. Internal risks include the death or illness of a business’ owner or one of its principles, as well as the danger of theft or fraud. Your business will also face technology risk, since one data breach can cost money and also damage your hard-earned reputation.
External risks are even harder to control, although you can take steps to protect against them. The stock market could tank, for instance, or a competitor could come in and take away many of your customers. A natural disaster can physically harm the business you’ve built, potentially taking you offline for months. A disaster preparedness plan can identify these dangers and help you to decide how to protect your business against them.
Impact of National Franchises
You’ve likely already heard plenty about the damage that national franchises do to local small businesses. Chain restaurants and department stores have shuttered many locally owned shops across the country. On a local level, these franchises may have a harmful effect on the overall economy, especially in smaller towns where businesses rely on being the only restaurant or shop of its type in the area.
However, on a national level, franchises do help strengthen the overall economy. Even locally, residents can benefit from the business opportunities and jobs that come from a franchise opening a location in the area. Although you have more control if you open your own small business, you may be able to purchase a franchise at a fraction of the price and have the support you need to run your business if you’re new to the practice.
Benefits for Employees
For today’s graduates, small and midsized businesses can put a wrinkle in the decisions they make as they start their career. A college graduate may find himself with two job offers – one from a well-known company with great benefits and the other a small business with a promising work culture, but less impressive healthcare and retirement savings offerings. For younger adults who aren’t yet concerned about retirement, small businesses can be enticing, especially if they're offering perks like flexible work hours and a ping pong table in the break room.
Most important in a young professional’s decision is the culture fit that a business will bring. If a small business is open to flexible work hours and creative freedom, for instance, that likely will override any concerns about copays at the doctor’s office. Although many small businesses may not have pension plans, employees are often given the option of contributing to an individual retirement account like a 401(k). If not, they can consult a financial adviser to start setting money aside on their own if they choose the small business route.
- SBA: Small Business Profile
- Electronic Code of Federal Regulations
- Fundera: What Is the SBA’s Definition of Small Business (And Why)?
- SBA: Size Standards Tool
- The World Bank: Entrepreneurs and Small Businesses Spur Economic Growth and Create Jobs
- ImpactHub: A Path out of Poverty.
- Digium: SMB, SME, and Large Enterprise: Why the Size of Your Business Matters
- SBA: Small Business Development Center
- Fundera: Want Free Money? Check Out This List of 106 Small Business Grants
- Fundera: Find the Best Small Business Loans for You
- Avalara: Sales Tax on Services by State
- Lawyers.com: Small Businesses May Be Exempt From Some Regulations
- SBA: 10 Steps to Start Your Business
- SBA: Risk Management for a Small Business
- LCR Franchise Finance: How Do Franchises Affect the Economy?
- SmallBizTrends: Pros and Cons of Buying A Franchise