Did you know that if your company runs on an extremely small scale, you may actually be considered a microbusiness (and not technically a small business)?
According to the U.S. Small Business Administration’s Office of Advocacy, a small business can be defined as one that has fewer than 500 employees, with certain exceptions and clarifications. For example, a book publisher could have up to 1,000 employees and still be considered a small business. However, there's a category even smaller, and that's a microbusiness.
So what exactly is a microbusiness? The U.S. Small Business Administration defines a microbusiness as a firm that has between one and nine employees, including the owner. Some common examples of microbusiness-owners are photographers, event planners, housekeepers, professional service providers, consultants and freelancers in any field, and those working in the gig economy, such as Etsy store owners, Uber drivers and Airbnb hosts.
Basically, all microbusinesses are small businesses — in fact, they are a subcategory of small businesses based on the total number of employees. Therefore, your company can be classified as a microbusiness if it employs fewer than nine people (while some definitions may cap the number of employees at six).
Microbusinesses Have Unique Challenges
This distinction between a small business and a microbusiness essentially means that a microbusiness operates with a very minimal amount of business activity, receipts and staff members. And while this distinction may not seem too important, there are a number of things to keep in mind if you do operate a microbusiness.
These are other guidelines that can determine whether your business is micro or small:
- If you are self-employed, are a sole proprietor or have no employees
- If your business requires less than $50,000 to start
- If your company does not have access to traditional capital loans
- If you have less than $250,000 in sales
Since microbusiness can also be identified as small businesses, the latter are generally classified as for-profit organizations that are independently owned and operated, but do not dominate their local market or industry.
How is a microbusiness different from a small business? Even though microbusinesses are technically small businesses, differentiating between the two is important to know when launching and operating a small enterprise. Identifying as a microbusiness owner will help you better understand the challenges and requirements that you’re likely to face while running your company. These challenges will not be the same as a larger small business owner’s, which means that the solutions will be different, too.
Microbusinesses comprise a largest segment of the entrepreneurial community — approximately 92 percent of all American businesses are microbusinesses. However, these businesses continue to receive little attention as far as their importance in the overall economic landscape goes.
These companies face certain challenges that small businesses do not typically experience. Some of these challenges are:
- They have a harder time hiring talented employees, usually due to lack of exposure.
- For the same reason, microbusinesses don’t have the same customer reach as their larger counterparts.
- These businesses may also face problems getting loans from traditional financial institutions, especially if the businesses are too small.
- Microbusinesses have a harder time developing lines of credit with vendors because of the increased risk of default.
It’s not all bad! A microbusiness will have different operating goals than a larger business, and therefore, will have lower operating expenses. Because of this, the goal of a microbusiness owner should be to increase revenue. While other businesses try to cut costs, a microbusiness’ costs are probably already low.
Outsourcing Can Help
If a microbusiness owner chooses to operate as a sole proprietorship, they will be taxed at their personal tax rate. Most microbusiness owners operate under this structure because it takes less effort to register and file paperwork, but the business structure they choose for their microbusiness, or any small business, changes the way their taxes are assessed.
Also, many small businesses, if registered as a corporation or an LLC, find that their taxes are assessed at a corporate tax rate instead of the personal tax rate that microbusinesses use.
Microbusinesses may employ just a few staff members but not enough to warrant in-house payroll, HR or accounting teams; however, they still have to perform payroll functions to ensure adherence to payroll taxes, corporate taxes and the government’s fiscal policies. This puts them in a perfect position to outsource to an independent company that specializes in payroll and accounting.