Types of Micro Business
Micro businesses are the smallest organizations in the small business segment. However, their ranks are far, far from being micro. According to the U.S. Small Business Administration, 78.5 percent of small businesses are "nonemployer" firms, meaning that they have no employees.
Other names by which these organizations are known include:
- Micro enterprises (term often used outside the United States)
- SOHO (Small Office, Home Office)
- Home based businesses
- Solopreneurs (an entrepreneurial business that has one person in it)
- Freelance artists and consultants
- Independent contractors (a tricky designation that will be discussed later)
- Independent distributors (term is often used for representatives in multilevel marketing organizations)
- eBay, Etsy and other online sellers
As the SBA notes, what defines a micro business from other small businesses and larger organizations, is:
- Fewer than 5 employees
- Little capital requirement to get started which, as of this writing, is $35,000
Interestingly, micro business does not mean that the money to be made is "micro," too! It's more about the investment required. However, as noted in Entreprenuer vs. Small Business: What's the Difference?, a micro business with this number of employees would be considered a small business until it reaches $7 million in revenues (as of this writing and varying by industry classification).
Though micro businesses may be made up of only one person, they are not just sole proprietorships. They can be structured as partnerships and corporations, too, depending on what legal entity is most advantageous.
Also, not all micro businesses are home based businesses, although that is quite common.
Easy In, Easy Out
Though for many people up to $35,000 seems like a huge investment, it is relatively low by business investment standards. Some micro businesses can even be started for less than $100! And with that low investment barrier to entry, it is easy for people to get started with these ventures. On the flip side, a low level of investment also makes it easy for people to walk away from the micro businesses they start.
Independent Contractors & Taxing Issues
One of the more risky sides of micro businesses is taxation issues.
Many who leave the standard workforce to strike it out on their own can run into problems with classification as independent contractors, sometimes ironically working for their former employers. The United States Internal Revenue Service (IRS) has defined an independent contractor under this rule:
The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.
This has become and continues to be a major issue and gray area—for both micro businesses and the organizations that hire them—as more people lose their jobs and decide to work for themselves in difficult economies.
Another issue that arises is whether the business is truly a business or a hobby. This question really comes up when a person is looking for a way to write off their hobby expenses by creating a business.
Consulting a CPA or tax professional is recommended for all micro businesses to avoid taxation surprises and learn what tax rules and deductions apply to them.
Micro Business, Macro Exposure
With the advent of the Internet, almost everyone has the capability to make money online by doing things such as hosting advertising on their sites, becoming a seller on eBay, writing and more. But doing business online is being in business! This opens up a host of insurance and other business issues that many micro businesses are ill prepared to face.
For example, selling crafts seems like a wonderful idea for sharing one's talents and making money doing it. But say that the craft sold is a food product (not an uncommon scenario). Should that person carry commercial insurance to cover any claim or lawsuits due to foodborne illness? Granted, the level of distribution and exposure could be very low, unlike major branded products which are sold by the millions. However, the possibility exists.
Consult a commercial and professional liability insurance provider (as opposed to one that just handles personal lines such as home, auto and life) to determine what coverages apply and policy costs. Consulting a legal professional on contracts and business laws that apply to the operation is also recommended.
Questions & Answers
© 2013 Heidi Thorne