Small Business

What is a Small Business?

There is much ambiguity when it comes to characterizing small businesses.

We’ve all heard the soundbites, “99.9% of all businesses are small businesses.” Or how about this one: “48.7% of all employees work at small businesses.” But what constitutes a small business? You probably have this image in your mind of a small town with the local mom and pop bakery or convenience store. But you’d be surprised that this image of a “small business” is far from the norm.

We’ll breakdown some small business myths and stereotypes to reveal the true image of a small business in the US.

Small Business Definition

The definition of a small business varies depending on the industry and the geographic location. For example, according to the Small Business Administration, a baked goods shop generating $8 million in sales is not considered a small business while a Pharmacy generating $25 million in sales is.

How can this be? Well, the definition of a small business is relative to those within the industry. A business can be generating millions of dollars in sales each year and be considered a small business because the big players in that industry are generating billions of dollars each year.

This is even true for businesses in common industries. One would assume the definition for a small layer’s office and a small tax-prep shop to be identical. However, the threshold for a small tax practitioner is almost double that of a layer’s office. A tax practitioner generating $20 million in revenue is still considered a small business while a lawyer bringing in $11 million in sales isn’t considered a small business.

Most Small Businesses Are 1 Person Shops

According to the U.S. Census, over 75% of businesses are non-employer businesses (business without employees). Even more striking, half of all businesses are run out of the owner’s home. That’s right, the face of small business in the US is not the local mom and pop shop but b single person running a business out of their basement.

Most Small Businesses Earn Less Than $100K Per Year

65% of all small businesses have annual sales less than $100,000 per year. That means these business owners are taking home far less than $100,000 per year after deducting expenses and taxes. Roughly 96% of small businesses have sales less than $1 million per year.

Most Small Businesses Are Run by Men

According to the U.S. Census, in 2012 roughly two in three businesses are owned and operated by men. Although women slightly outnumber men in the U.S., they are disproportionately absent when it comes to business ownership.

However, there has been an increase in the number of women led businesses. In 2007 less than 30% of businesses were owned by woman, but in 2012 this number increased to 35%.

50% of Small Businesses Survive the First 5 Years

Only half of all small businesses will survive the first five years. Even scarier, half of that half will make it the next 5 years. Being profitable takes time and many small businesses simply run out of money before they can make it off the ground.

71% of Businesses are Taxed at Personal Income Tax Rates

The far majority of small businesses are passthrough entities. This means the individual owners pay tax on their earnings at the personal income tax rates. Just for some context, sole proprietors and partnerships constituted 94% of non-employers in 2010; thus a tax increase or tax decrease for individuals directly increases or decreases the taxes paid by the vast majority of small business owners.

So What is a Small Business?

The definition of a small business can be ambiguous and it depends on who you ask, but for the most part, 99.99% of businesses are small businesses. So, if you own your own business then chances are you own a small business. More than ever it’s important to have a trusted advisor on your side to navigate the complexities of owning and operating a small business.

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.
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