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Small businesses are normally privately owned corporations, partnerships, or sole proprietorships. What businesses are defined as "small" in terms of government support and tax policy varies depending on the country and industry. Small businesses range from 15 employees under the Australian Fair Work Act 2009, 50 employees according to the definition used by the European Union, and fewer than 500 employees to qualify for many U.S. Small Business Administration programs. Small businesses can also be classified according to other methods such as sales, assets, or net profits.
Small businesses are common in many countries, depending on the economic system in operation. Typical examples include:convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants,guest houses, photographers, small-scale manufacturing, and online businesses, such as web design and programming, etc.
Characteristics
Researchers and analysts of small or owner-managed businesses generally behave as if nominal organizational forms (e.g., partnership, sole-trader or corporation) and the consequent legal and accounting boundaries of owner-managed firms are consistently meaningful. However, owner-managers often do not delineate their behavior to accord with the implied separation between their personal and business interests. Lenders also often contract around organizational (corporate) boundaries by seeking personal guarantees or accepting privately held assets as collateral. Because of this behavior, researchers and analysts should reject the relevance of the organizational types and implied boundaries in many contexts relating to owner-managed firms. These include analyses that use traditional accounting disclosures, and studies that view the firm as defined by some formal organizational structure.
Size definitions
The legal definition of "small business" varies by country and by industry. In the United States the Small Business Administration establishes small business size standards on an industry-by-industry basis, but generally specifies a small business as having fewer than 500 employees for manufacturing businesses and less than $7.5 million in annual receipts for most non manufacturing businesses. The definition can vary by circumstance – for example, a small business having fewer than 25 full-time equivalent employees with average annual wages below $50,000 qualifies for a tax credit under the health care reform bill Patient Protection and Affordable Care Act.
The European Union generally defines a small business as one that has fewer than 50 employees. However, in Australia, a small business is defined by the Fair Work Act 2009as one with fewer than 15 employees. By comparison, a medium-sized business or mid-sized business has less than 500 employees in the US, and fewer than 200 in Australia.
In addition to number of employees, other methods used to classify small companies include annual sales (turnover), value of assets and net profit (balance sheet), alone or in a mixed definition. These criteria are followed by the European Union, for instance (headcount, turnover and balance sheet totals). Small businesses are usually not dominant in their field of operation.
Demographics
According to the 2012 Survey of Business Owners (SBO) there are:
27.6 million businesses in the United States
9.9 million of these businesses in the United States were owned or led by a woman, representing 35.9% of overall business ownership.
Franchise businesses
Franchising is a way for small business owners to benefit from the economies of scale of the big corporation (franchiser). McDonald's and Subway are examples of a franchise. The small business owner can leverage a strong brand name and purchasing power of the larger company while keeping their own investment affordable. However, some franchisees conclude that they suffer the "worst of both worlds" feeling they are too restricted by corporate mandates and lack true independence.It is an assumption that small business are just franchisees, but the truth is many franchisors are also small business, Although considered to be a successful way of doing business, literature has proved that there is a high failure rate in franchising as well, especially in UK, where a research identifies out of 1658 franchising companies operating in1984 only 601 remained existent 1998, a mere 36%.
Retailers' cooperative
A retailers' cooperative is a type of cooperative which employs economies of scale on behalf of its retailer members. Retailers' cooperatives use their purchasing power to acquire discounts from manufacturers and often share marketing expenses. It is common for locally owned grocery stores, hardware stores and pharmacies to participate in retailers' cooperatives. Ace Hardware, True Value, and NAPA are examples of a retailers' cooperative.
Advantages
A small business can be started at a low cost and on a part-time basis. A small business is also well suited to internetmarketing because it can easily serve specialized niches, something that would have been more difficult prior to the internet revolution which began in the late 1990s. Adapting to change is crucial in business and particularly small business; not being tied to any bureaucratic inertia, it is typically easier to respond to the marketplace quickly. Small business proprietors tend to be intimate with their customers and clients which results in greater accountability and maturity.
Independence is another advantage of owning a small business. One survey of small business owners showed that 38% of those who left their jobs at other companies said their main reason for leaving was that they wanted to be their own bosses. Freedom to operate independently is a reward for small business owners. In addition, many people desire to make their own decisions, take their own risks, and reap the rewards of their efforts. Small business owners have the satisfaction of making their own decisions within the constraints imposed by economic and other environmental factors.However, entrepreneurs have to work for very long hours and understand that ultimately their customers are their bosses.
Often, leaving your regular job to start a business put pressure on the new business venture and causing the business to fail due to the revenue not meeting expectation. Especially true if one has quit their job to start it up. It is important to recognize this before any job resignation.
Several organizations, in the United States, also provide help for the small business sector, such as the Internal Revenue Service's Small Business and Self-Employed One-Stop Resource.
Small businesses (often carried out by family members) adjust quicker to the changing conditions, however they are closed to the absorption of new knowledge and employing new labour from outside.
Problems faced by small businesses
Small businesses often face a variety of problems related to their size. A frequent cause of bankruptcy is undercapitalization. This is often a result of poor planning rather than economic conditions - it is common rule of thumb that the entrepreneur should have access to a sum of money at least equal to the projected revenue for the first year of business in addition to his anticipated expenses. For example, if the prospective owner thinks that he will generate $100,000 in revenues in the first year with $150,000 in start-up expenses, then he should have not less than $250,000 available. Failure to provide this level of funding for the company could leave the owner liable for all of the company's debt should he end up in bankruptcy court, under the theory of undercapitalization.
In addition to ensuring that the business has enough capital, the small business owner must also be mindful of contribution margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the contribution margin equals fixed costs. When they first start out, many small business owners underprice their products to a point where even at their maximum capacity, it would be impossible to break even. Cost controls or price increases often resolve this problem.
In the United States, some of the largest concerns of small business owners are insurance costs (such as liability and health), rising energy costs, taxes and tax compliance. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.
Contracting fraud has been an ongoing problem for small businesses in the United States. Small businesses are legally obligated to receive a fair portion (23 percent) of the total value of all the government's prime contracts as mandated by the Small Business Act of 1953. Since 2002, a series of federal investigations have found fraud, abuse, loopholes and a lack of oversight in federal small business contracting, which has led to the diversion of billions of dollars in small business contracts to large corporations.
Another problem for many small businesses is termed the 'Entrepreneurial Myth' or E-Myth. The mythic assumption is that an expert in a given technical field will also be expert at running that kind of business. Additional business management skills are needed to keep a business running smoothly. Some of this misunderstanding arises from the failure to distinguish between small business managers as entrepreneurs or capitalists. While nearly all owner-managers of small firms are obliged to assume the role of capitalist, only a minority will act as entrepreneur. The line between an owner-manager and an entrepreneur can be defined by whether or not their business is growth oriented. In general, small business owners are primarily focused on surviving rather than growing, therefore not experiencing the five stages of the corporate life cycle (birth, growth, maturity, revival, and decline) like an entrepreneur would.
Still another problem for many small businesses is the capacity of much larger businesses to influence or sometimes determine their chances for success. Networking and social media has been used as a major tool by small business in UK, but most of them just use a scatter-gun approach in a desperate attempt to exploit the market which has proven to be on no success. Over half of small firms lack a business plan. A Business plan is considered one of the most important factors for its success, business planning is associated with positivity in growth and if you are looking at funding most of them require a business plan, and this also serves as a strategic planning document which soon acts as a bible for decision making An international trade survey reveals that British share of chamber business who are exporting rose from 32% in 2012 to 39% in 2013, although this may seem positive in reality the growth is slow as small business owners shy away from exporting due to perceived barriers. Learning the basics of a foreign language could be the solution to open new markets doors, it is a reality that not all foreign nations speak English. China is stated to grow by 7.6% in 2013 and still sadly 95% of business owners who want to export to china have no desire and no knowledge to learn their local language.
Bankruptcy
When small business fails, the owner may file bankruptcy. In most cases this can be handled through a personal bankruptcy filing. Corporations can file bankruptcy, but if it is out of business and valuable corporate assets are likely to be repossessed by secured creditors there is little advantage to going to the expense of a corporate bankruptcy. Many states offer exemptions for small business assets so they can continue to operate during and after personal bankruptcy. However, corporate assets are normally not exempt, hence it may be more difficult to continue operating an incorporated business if the owner files bankruptcy. Researchers have examined small business failures in some depth, with attempts to model the predictability of failure.
Social responsibility
Small businesses can encounter several problems related to corporate social responsibility, due to characteristics inherent in their construction. Owners of small businesses often participate heavily in the day-to-day operations of their companies. This results in a lack of time for the owner to coordinate socially responsible efforts. Additionally, a small business owner's expertise often falls outside the realm of socially responsible practices contributing to a lack of participation. Small businesses also face a form of peer pressure from larger forces in their respective industries making it difficult to oppose and work against industry expectations. Furthermore, small businesses undergo stress from shareholder expectations. Because small businesses have more personal relationships with their patrons and local shareholders they must also be prepared to withstand closer scrutiny if they want to share in the benefits of committing to socially responsible practices or not.
Job quality
While small businesses employ over half the workforce and have been established as a main driving force behind job creation the quality of the jobs these businesses create has been called into question. Small businesses generally employ individuals from the Secondary labor market. As a result, in the U.S. wages are 49% higher for employees of large firms. Additionally, many small businesses struggle or are unable to provide employees with benefits they would be given at larger firms. Research from the U.S. Small Business Administration indicates that employees of large firms are 17% more likely to receive benefits including salary, paid leave, paid holidays, bonuses, insurance, and retirement plans. Both lower wages and fewer benefits combine to create a job turnover rate among U.S. small businesses that is 3 times higher than large firms. Employees of small businesses also must adapt to the higher failure rate of small firms. In the U.S. 69% last at least 2 years, but this percentage drops to 51% for firms reaching 5 years in operation. The U.S. Small Business Administration counts companies with as much as $35.5 million in sales and 1,500 employees, depending on the industry. Outside government, companies with less than $7 million in sales and fewer than 500 employees are widely considered small businesses.
Benefits of supporting local business
By opening up new national level chain stores, the profits of locally owned businesses greatly decrease and many businesses end up failing and having to close. This creates an exponential effect. When one store closes, people lose their jobs, other businesses lose business from the failed business and so on. In many cases large firms displace just as many jobs as they create.
Contribution to the economy
In the US, small business (fewer than 500 employees) accounts for more than half the nonfarm, private GDP and around half the private sector employment. Regarding small business, the top job provider is those with fewer than 10 employees, and those with 10 or more but fewer than 20 employees comes in as the second, and those with 20 or more but fewer than 100 employees comes in as the third (interpolation of data from the following references). The most recent data shows firms with fewer than 20 employees account for slightly more than 18% of the employment.[27] According to "The Family Business Review," "There are approximately 17 million sole-proprietorships in the US. It can be argued that a sole-proprietorship (an unincorporated business owned by a single person) is a type of family business" and "there are 22 million small businesses (fewer than 500 employees) in the US and approximately 14,000 big businesses." Also, it has been found that small businesses created the most new jobs in communities, "In 1979, David Birch published the first empirical evidence that small firms (fewer than 100 employees) created the most new jobs" and Edmiston claimed that "perhaps the greatest generator of interest in entrepreneurship and small business is the widely held belief that small businesses in the United States create most new jobs. The evidence suggests that small businesses indeed create a substantial majority of net new jobs in an average year." Local businesses provide competition to each other and also challenge corporate giants.
Of the 5,369,068 employer firms in 1995, 78.8 percent had fewer than 10 employees, and 99.7 percent had fewer than 500 employees.
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