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What is a Small Business?

By Maggie Worth
Updated May 16, 2024
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A small business is roughly defined as one with few employees, limited revenues and a constrained market reach. Small businesses can be structured in a number of ways and may operate in nearly any industry. Local governments often applaud small, local business as being good for the community and for the tax base. The corner baker, local insurance agent and specialty gift shop are likely to be a small business in most towns.

There is no specific, quantifiable and universal definition of a small business, but the term may be defined by very specific parameters in some situations, particularly when dealing with governmental, financial or regulatory agencies. Such agencies often extend tax cuts, special financing offers and requirement exemptions to small businesses. A business that wants to take advantage of such offers must prove that it meets the definition of a small business as set forth by the entity in question.

Businesses considered 'small' do often share common characteristics. A small business will usually be privately-held, meaning that company shares are not traded on the open market. Ownership in the company is often held by a single individual, called a sole proprietor. The company may also be structured as a partnership, a corporation or, in locations where such entities are allowed, as a limited-liability company. In small businesses, the principles or company owners are usually related, or at least well-acquainted.

In most cases, the small business owner works at the business. While she may have additional employees or may only come into the business at specified times, customers will often see her behind the cash register or at client meetings. This can vary, especially once the business becomes financially independent or if the owner has more than one business, but most owners will retain a close personal interest in the operations of the company.

Most small businesses also have limited liquid capital, both in the start-up stage and during subsequent operations. As a result, the ability to buy mass quantities at discounted prices, the ability to access new technologies and the budget for significant marketing efforts may be adversely affected. For these reasons, small businesses generally have few employees and may be unable to provide worker benefits available at larger corporations. Product-oriented businesses will be unlikely to match department store prices. Service-oriented companies, however, are often less expensive than large corporations because of the reduced overhead.

Small businesses may also be called micro-businesses, neighborhood businesses and mom and pop businesses. Many localities have associations and membership groups designed to support and promote area small businesses. These associations may offer business classes and networking opportunities for small business owners and may host events to showcase these businesses to the public. Common industries for small businesses include retail; hospitality; food service; consulting; personal services, such as hair salons or alterations work; and professional services, such as law or tax accountancy.

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Discussion Comments
By pastanaga — On Oct 29, 2014

@croydon - You can definitely do both. The reason small businesses don't often last is simply that the first couple of years are extremely difficult for even the best small businesses, because they have loans to repay and a name to establish. Starting a small business is very tough, but if you can get past the first few years there's no reason a niche business can't thrive in the right circumstances.

By croydon — On Oct 28, 2014

@umbra21 - I always feel sad when a small business closes down because it probably means that someone has failed in their dream. That's why I like them so much. They will usually have very special items because the owner is picking them out of love and interest rather than because they are more commercially viable.

Which is probably why they don't last that long, I guess. It unfortunately makes more financial sense to get the cheapest products and sell as many of them as possible rather than concentrating on whatever it was the person started the small business for in the first place. It's the ones that are acting like a business that survive, rather than the ones that are trying to follow a dream.

By umbra21 — On Oct 27, 2014

I'm very fond of small businesses because they usually have much more unique products than you'd find in a larger one. My town has quite a few little independent clothing boutiques (probably because there is a design college nearby) and I like shopping at them because I know very few other people will be wearing the same clothes as me.

The only problem with it is that you have to get lucky to get the right size since they usually won't have the full range of sizes available since everything is made by hand.

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