A small business may be defined as a business with a small number of employees. The legal definition of "small" often varies by country and industry, but is generally under 100 employees in the United States while under 50 employees in the European Union (In comparison, the American definition of mid-sized business by the number of employees is generally under 500 while 250 is for that of European Union). These businesses are normally privately owned corporations, partnerships, or sole proprietorships.
However, other methods are also used to classify small companies, such us annual sales (turnover), assets value or 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 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, solicitors, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing etc. Small businesses are usually independent.
The smallest businesses, often located in private homes, are called microbusinesses (term used by international organizations such as the World Bank and the International Finance Corporation) or SoHos. The term "mom and pop business" is a common colloquial expression for a single-family operated business with few (or no) employees other than the owners. When judged by the number of employees, the American and the European definitions are the same: under 10 employees.
Advantages of small business
A small business can be started at a very low cost and on a part-time basis. Small business is also well suited to internet marketing because it can be very manageable to serve a niche, 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 resulting in greater accountability and responsiveness.
Several organizations also provide help for the small business, like Internal Revenue Service in Small Business and Self-Employed One-Stop Resource.
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 no 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 gross margin (sales minus variable costs). To break even, the business must be able to reach a level of sales where the gross margin exceeds 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. The good news is that cost controls or a price increase can 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 and taxes. In the United Kingdom and Australia, small business owners tend to be more concerned with excessive governmental red tape.
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.
Marketing the small business
Common marketing techniques for small business include networking, word of mouth, customer referrals, yellow pages directories, television, radio, outdoor (roadside billboards), print and internet. Electronic media like TV can be quite expensive and is normally intended to create awareness of a product or service.
Many small business owners find internet marketing more affordable. Google AdWords and Yahoo! Search Marketing are two popular options of getting small business products or services in front of motivated Web searchers. Advertising on niche sites can also be effective, but with the long tail of the internet, it can be time intensive to advertise on enough sites to garner an effective reach.
Franchising is a way for small business owners to benefit from the economies of scale of the big corporation (franchisor). McDonald's restaurants are an example 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. McDonald's has even been sued by franchisees who feel they have been exploited with unreasonable costs for materials (cups, condiments etc.) they are required to purchase from the parent company.
Small business 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.
Certification and trust
Building trust with new customers can be a difficult task for a new and establishing business. Some organizations like the Better Business Bureau and the International Charter now offer Small Business Certification, which certifies the quality of the services and goods produced and can encourage new and larger customers. These services may require a few hours of work, but a certification may reassure potential customers. However, the most effective way to earn trust is through customer referrals.
Contribution to the economy
Small Businesses are the major job providers in most economies. The top job provider is those with less than 10 employees, and those with 10 or more but less than 20 employees comes in as the second, and those with 20 or more but less than 50 employees comes in as the third.