The sole proprietorship is a simple, informal structure that is inexpensive to form. It is usually owned by a single person or a marital community. The owner operates the business, is personally liable for all business debts, can freely transfer all or part of the business, and can report profit or loss on personal income tax returns.
There are many types of licenses that may be required. You need one to operate legally almost everywhere. If the business is located within an incorporated city limits, a license must be obtained from the city; if outside the city limits, then from the county. If you are planning on occupying a new or used building for a new business, you may have to apply for a Certificate of Occupancy from a city or county zoning department. Businesses that use a name other than the owner's must register the fictitious name with the county as required by the Trade Name Registration Act. This does not apply to corporations doing business under their corporate name or to those practicing any profession under a partnership name.
Business owners are required by law to withhold the following from the wages paid to employees: federal income taxes, state income taxes and FICA (Social Security) Insurance. Income taxes will also be levied by the federal and state governments on earnings of any business. Therefore, each business must file an income tax return with both agencies. Businesses may be required to file estimated tax returns and pay estimated taxes on a quarterly basis.
Most people get their definition of "small business" from personal experience in dealing with small retail stores and service organizations. Most people also have a minimum size in mind and overlook a whole category of small business, the very small operations Europeans call "micros"; furthermore, most people do not realize that quite sizeable businesses are considered "small" under U.S. law. Definitions are typically based on the number of people employed or on sales volume, but in defining small business, there is no "one-size fits all." More true is the expression: "Different strokes for different folks," meaning that definitions are based on the economic sector in which a business operates. Small business may also be defined by a way of looking at the world; it has a cultural meaning; it is a way of life. Thus the definition has qualitative aspects the law doesn't care about. A quite small business may behave like a very large one because its owners have a certain view; conversely quite large corporations are sometimes still run like small businesses and exemplify the values of small business.
OFFICIAL SIZE DEFINITIONS
In most industrialized countries small businesses are treated in special ways. They are eligible for financial programs or get favored treatment under the tax laws. For this purpose governments publish official size standards. In the U.S. such definitions are issued by the U.S. Small Business Administration's Office of Size Standards. SBA's basic definition begins with a listing of common features. A small business must be 1) organized for profit; 2) have a place of business in the United States; 3) make a significant contribution to the U.S. economy by paying taxes or using American products, materials, or labor; and 4) be at or below the numerical size standard for its industry. So what is this size standard?
U.S. Size by NAICS
SBA determines size for businesses in Manufacturing, Wholesale Trade, Mining, and certain other specific industries by employment size. For others it uses revenue size except in Banking, where asset size rules. Manufacturing enterprises with 500 and fewer employees are small businesses, although there are some industries within that sector with higher tilt-points, as discussed below; in the Wholesale Trade sector, the upper limit is 100 employees. This number is widely used as the definition of smallness in ordinary assessments and in eyeballing small business generally. The number is easy to remember; it is easier to get a headcount than revenue data; and Census data on employment by firm are readily available. But the "100-and-under" definition is official only for businesses in the wholesale trades.
For businesses in all other fields the definitions are based on revenue; this makes it easy for the small business to establish its own eligibility but much more difficult for analysts of small business to classify a population of companies as "small" or "large." In descending order of revenues, the major sectors (as summarized by SBA) are:
- General and Heavy Construction, $31 million
- Dredging (technically part of construction but singled out here), $18.5 million
- Special Trade Contractors, $13 million
- Retail Trade and Business and Personal Services, $6.5 million
- Architectural, Engineering, Mapping Services, Dry Cleaning and Carpet Cleaning Services, $4.5 million
- Travel Agencies, $3.5 million
- Agriculture, $750,000.
Businesses in these categories may maximally have the revenues shown and still be considered small businesses. The values thus represent upper limits.
These summaries, however, are not the detailed definitions. Those are published by the SBA in a special Table organized by North American Industrial Classification System (NAICS) codes (see references). The Table lists exceptions, typically showing larger sizes for certain NAICS industries. To illustrate, within the Agriculture Sector, where the top is generally defined as $750,000 in revenues, Feedlots may have revenues up to $2 million, Chicken Egg Production up to $11.5 million, Forestry operations up to $6.5 million, and Logging may have 500 employees. Fishing operations top out at $4 million, and Agricultural and Forestry Support activities are $6.5 million except Forest Fire Suppression and Fuel Management Services where the top size is $16.5 million. The example illustrates that summary data are very general. The business owner needs to obtain his or her NAICS code and then look at the Table for the precise definition for his or her operation.
The Table also includes whole sectors left out of the summary such as Mining (generally 500 employees); Utilities (4 million megawatt hours a year or less); Transportation (1,500 employees for airlines, long haul rail, and pipelines; 500 for water transport; $23.5 million in revenues for Trucking; $6.5 million for others); Information (500 employees for Publishing, 1,500 for Telecommunications); Real Estate and Rental ($2 million is the smallest revenue category for Real Estate Offices, $23.5 the largest for Vehicle and Truck Leasing); Finance and Insurance ($165 million in assets for Banks; $6.5 million in revenues for an insurance brokerage); and there are others.
IN CANADA AND EUROPE
As reported by GDSourcing, a company that retails Canadian federal statistics, Canada divides its small business into two categories, "small" and "medium." The small business is defined as one with revenues between $30,000 and $5 million whereas a medium-sized business has revenues between $5 million and $25 million. The dollars are Canadian. Generally, in Canada, the United Kingdom, and other former British Commonwealth countries the small business sector is referred to as the SMEs, which includes both categories: small and medium enterprises.
Based on data from the University of Strathclyed in the UK, the British definition of "small" is sales ("turnover") of not more than £5.6 million, assets of not more than £2.8 million, and not more than 50 employees. A medium-sized company has sales of £22.8 million, assets of £11.4 million and not more than 250 employees. The definitions were set by the UK's Companies Act of 1985, as amended in 2004, for tax purposes. The British Bankers Association defines small business customers as proprietorships, partnerships, and companies with annual sales under £1 million.
The European Commission, in its Recommendation 2003/361/EC (May 6, 2003, effective January 1, 2005) has three categories for small business: micro enterprises have fewer than 10 employees and sales and assets both less than €2 million each. Small enterprises are defined as having fewer than 50 employees and sales and assets of €10 million each or less. A medium-sized enterprise has fewer than 250 employees, sales of not more than €50 million, and assets of not more than €43 million.
COMPANY DISTRIBUTION BY EMPLOYMENT
Just how big a role does small business play in American commerce? Data for 2003 available from the U.S. Census Bureau enable us to get a general feel. In that year the U.S. economy had 5.8 million companies employing 113.4 million people. The census provides breakdowns by employment range such as 1-4, 5-9, 10-19, 20-99, and 100-499 employees. Using all employment brackets up to the 20-99 category, the closest approximation to the "100-and-under" category generally used for defining a small business, data for 2003 showed that 98.2 percent of all firms could be classified as small. These companies employed 36.2 percent of all people working for the profit-making private sector. This means that the overwhelming majority of all companies are small and employ well over a third of private-sector workers. Big business, with just 1.8 percent of companies, however, employs the majority of people, 63.8 percent. This rough approximation, of course, understates the total for small businesses because in major industries a much higher employment cut-off is used (e.g. 500 employees). But we can test this number by looking at three major industries for which the SBA specifically identifies employment size as the cut-off: Manufacturing and Mining (500 in each case) and Wholesale Trade (100 employees).
In Manufacturing, 295,596 companies were active in 2003. Of these 291,494 had 499 or fewer employees. Thus 98.6 percent of Manufacturing firms were classified as small business. They employed 43.2 percent of the manufacturing workforce. In Mining 98.3 percent of companies were small (17,896 of 18,210) and employed 44.2 percent of the workforce in the industry. Finally, in Wholesale Trade, 331,633 of 342,450 firms fell into the 99 or fewer employee category—96.8 percent of companies. They employed 45.3 percent of those engaged in wholesale trade.
These three sectors in aggregate represented 11.4 percent of all firms and 18 percent of total employment. Small businesses within them were 11.3 percent of all small businesses and represented 21.8 percent of small business employment.
The data cited above exclude a very large category of tiny businesses—those that do not have employees at all. Their owners earn business income and are not paid a salary. The Census Bureau classifies these entities as "nonemployer businesses." They are America's own "micro" enterprises—the seeds from which small businesses with employees develop. Data released by the Bureau in connection with Small Business Week in 2006 indicate (again for the year 2003) that 18.6 million such businesses existed. They had revenues of $830 billion, equivalent to $44,623 per entity.
Who are these people? They are engaged across the board in every industrial sector, albeit, obviously, at a very small scale. An indication is provided by categories that had particularly strong growth between 2002 and 2003. They were real estate appraisers growing by 19.1 percent, nail salons (15.9 percent), landscape architectural services (14.6 percent), software publishers (14.4 percent), clothing accessories stores (12.9 percent), bed and breakfast inns (8.5 percent), carpet and upholstery cleaning services (7.5 percent), and confectionery and nut stores, growing 6.5 percent between 2002 and 2003.
The Census Bureau's press release also identified the biggest sectors as follows: "Four economic sectors accounted for almost 60 percent of nonemployer receipts in 2003—real estate and rental and leasing ($176.0 billion, or 21.2 percent); construction ($126.4 billion, or 15.2 percent); professional, scientific and technical services ($102.9 billion, or 12.4 percent) and retail trade ($80.5 billion, or 9.7 percent)."
The growth rate of nonemployer revenues was 5.7 percent between 2002 and 2003, the largest annual increase since the Bureau began collecting such statistics in 1997. The growth rate, of course, may in part be a reflection of bad news: individuals affected by slow recovery, outsourcings, and layoffs may have been, as it were, "fighting back" by creating a modest income for themselves by enterprise.
A DIFFERENT CULTURE
Anybody who has ever worked in or run a small business will be aware of a difference in culture between "small" and "big" business. The difference arises from structural factors, of course, but equally from different values. To be sure, in specific cases a small business may have "big business" values and attitudes arising from the experience and intentions of the owners. On the whole, however, the small business culture is marked by close and familiar contact between owners and employees; and the business as a whole is close to the outside world—customers, neighbors, and suppliers. Structural factors arise because communications in a small business are easy and informal; there is much less layering; contact with the world is immediate and does not require expensive market surveys. The owners very often work within the business and are not the abstract and distant symbol of a faceless stockholder somewhere out there. Much more so in small businesses than in large, the enterprise has a "family" or "tribal" atmosphere and the predominant value is continuity and survival rather than abstract concepts like profit, return, and asset appreciation. Being in close and direct contact with the environment ("belly-to-belly" as Japanese business people say), with information flow rapid and decisions easier to make and to implement, small businesses tend on the whole to be capable of rapid reaction—but are also limited by limited means.
The small business environment is both more open, free, quick, and "organic" than large structures where size alone imposes bureaucratic methods of control and slow communications through many layers of decision-makers. For this reason a highly disproportionate number of innovations arise first in small businesses. And, as the SBA points out, small business is also the source of most new jobs: 75 percent of net new jobs added to the economy come from small business. When it comes to the future, one can confidently say: "Small is beautiful."
"Canada's Small Business Data Centre." GDSourcing. Available from http://www.gdsourcing.ca/SBDC.htm. Retrieved on 18 April 2006.
"Small and Medium Sized Enterprises: Definitions." University of Strathclyed. Available from http://www.lib.strath.ac.uk/busweb/guides/smedefine.htm. Retrieved on 18 April 2006.
U.S. Census Bureau. "Statistics of U.S. Businesses: 2003." Available from http://www.census.gov/epcd/susb/2003/us/US-.HTM. Retrieved on 18 April 2006.
U.S. Census Bureau News. "Small Business Week 2006." Press Release. 27 March 2006.
U.S. Small Business Administration. "Small Business Statistics." Available from http://www.sba.gov/aboutsba/sbastats.html. Retrieved on 18 April 2006.
U.S. Small Business Administration. "Summary of Small Business Size Standards." Available from http://www.sba.gov/size/summary-whatis.html. Retrieved on 18 April 2006.
U.S. Small Business Administration. "Table of Small Business Size Standards Matched to North American Industry Classification System Codes." 5 January 2006. Available from http://www.sba.gov/size/sizetable2002.pdf. Retrieved on 18 April 2006.