Entrepreneur Versus Small Business Owner: What's the Difference?
In everyday conversation, the terms entrepreneur and small business owner are often used reflexively. But there are primary differences between them. Interestingly, the same person could be both at the same time!
According to the Merriam-Webster dictionary website, an entrepreneur is someone "who starts a business and is willing to risk loss in order to make money." So the term really does not reflect anything about the size of the company. It's more about the size of the loss a person is willing to absorb to pursue a business venture. An entrepreneur's organization could consist of one person or even hundreds of employees, generating hundreds or even hundreds of millions of dollars.
On the other hand, small business owners are completely defined by the size of their organization in terms of revenues and labor force. Though standards vary widely by industry, according to the Small Business Administration (SBA), a small business has less than a specified number of employees (a limit of 500 employees is common for many classifications) and under a certain revenue level (as of this writing, $7 million, with higher limits for several industries).
Indeed, a small business owner may make a sizable financial investment to start a business and may incur losses in the early going. At that point, they could be considered both a small business owner and an entrepreneur.
Of Kitchen Tables, Garages and Basements
The stories of gigantic companies that start from someone's kitchen table, garage or basement are appealing and inspirational to many wannabe business owners and entrepreneurs. But these humble home-based beginnings have little bearing on whether a business is considered a small business or an entrepreneurship.
Though an organization may start—or even continue to operate—as a home-based business, the willingness of the owner(s) to accept risk in exchange for potential rewards, number of employees and revenue volume still determine how it is classified.
Playing the Game of Risk
The aspect of "willing to risk loss" truly differentiates entrepreneurs from those who simply want to be self-employed or small business owners. Self-employed and small business owners may be more likely to latch onto business opportunities that are more sure bets since they are often seeking personal income as opposed to merely profits.
A perfect example of a more sure business bet is investing in a franchise (e.g., Subway restaurants, UPS stores). The franchisee does not have to build the business from scratch. Often, the franchisor has done extensive location and market research, frequently offering sales territory protection along with turnkey marketing and operational programs. These benefits have been built on the franchisor's success and experience, lowering the level of business risk. Therefore, franchisees are less likely to be considered entrepreneurs (although the franchisor might be!).
On the other hand, entrepreneurs are driven by their passions, their desire to build empires or their wish to change the world. Famous entrepreneurs include:
- Richard Branson, founder of the extensive Virgin empire.
- Bill Gates, founder of Microsoft.
- Mark Cuban, owner of the Dallas Mavericks professional basketball team, as well as star of the reality show, Shark Tank.
- Jeff Bezos, founder of ecommerce giant Amazon.com.
What unites these iconic entrepreneurial leaders is their willingness to attempt new ventures which capitalize on their visions, knowledge, experience, connections, convictions and interests... even if there is a high degree of risk involved. For example, take Branson's Virgin Galactic commercial space travel venture. That certainly qualifies as a high risk and high investment venture at every turn!
Though they have a high tolerance for risk, successful entrepreneurs are very unlikely to enter into any venture without sound research, analysis and advice. Risky does not equal reckless.
Would you be willing to lose 100% or more of your business investment to be an entrepreneur?
Limit of Loss for Entrepreneurs (and Small Businesses, too!)
Sure, entrepreneurs are willing to accept loss, sometimes for an extended period of time. But this isn't a free pass to claim losses on tax returns indefinitely. The United States' Internal Revenue Service has established limits for how many years a business loss can be claimed on tax returns. These limits apply whether the organization is a small business or entrepreneurship. Consult a CPA or other tax professional for current limits and reporting requirements.
Also, willingness to accept loss does not mean that a loss must be incurred. While entrepreneurs are willing to tolerate negative financial situations to pursue their goals, they ultimately want—as the entrepreneur definition notes—to make money!
Disclaimer: Any examples used are for illustrative purposes only and do not suggest affiliation or endorsement. The author/publisher has used best efforts in preparation of this article. No representations or warranties for its contents, either expressed or implied, are offered or allowed and all parties disclaim any implied warranties of merchantability or fitness for your particular purpose. The advice, strategies and recommendations presented herein may not be suitable for you, your situation or business. Consult with a professional adviser where and when appropriate. The author/publisher shall not be liable for any loss of profit or any other damages, including but not limited to special, incidental, consequential, or other damages. So by reading and using this information, you accept this risk.
© 2013 Heidi Thorne