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Small businesses and why people open them.
Although large corporations dominated the business scene for many decades, in recent years small businesses have once again come to the forefront of the U.S. economy. In fact, about 98 percent of the businesses in the United States have fewer than 100 employees. Small businesses are important to the U.S. economy. By some estimates, U.S. small businesses in the aggregate would rank fourth among the world's economic powers based on the total value of goods and services they produce.

Let's look at some of the main reasons behind the increase in small business formation:
  • Independence and a better lifestyle. Large corporations no longer represent job security or offer as many fast-track career opportunities. Midcareer employees leave the corporate world in search of new opportunities. Many new college and business school graduates shun the corporate world altogether and start their own companies or look for work with small firms.
  • Personal satisfaction from work. Many small business owners cite this as one of the primary reasons for starting their companies. They love what they do.
  • Best route to success. Small businesses offer their owners the potential for profit. Also, business ownership provides greater advancement opportunities for women and minorities.
  • Rapidly changing technology. Advances in computer and telecommunications technology, as well as the sharp decrease in the cost of technology, have given individuals and small companies the power to compete in industries that were formerly closed to them. The arrival of the Internet and World Wide Web is responsible for the formation of many small businesses.
  • Outsourcing. As a result of downsizing, corporations often contract out with outside firms for services they used to provide in-house. This "outsourcing" creates opportunities for smaller companies, many of which offer specialized goods and services.
  • Major corporate restructurings and downsizings. These force many employees to look for other jobs or careers.
What is Small Business?

How many small businesses are there in the United States? Estimates range from over 5 million to almost 20 million, depending on how government agencies and other groups define a business and the size limits they use. The database of the federal Small Business Administration, which uses the number of business enterprises, lists about 5.4 million firms with fewer than 500 employees as of 1995. The Bureau of Labor Statistics estimates that another 10.5 million individuals are self-employed.

So what makes a business "small"? As we've seen, there are different interpretations, and the range is extremely broad. Generally, though, a small business has the following characteristics:

  • Independently managed
  • Owned by an individual or a small group of investors
  • Based locally (although the market it serves may be widespread)
  • Not a dominant company (thus it has little influence in its industry)
Small businesses in the United States can be found in almost every industry group. Small businesses include the following:
  • Services. Service firms are the most popular category of small businesses because they are easy and low cost to start. They are often small; very few service-oriented companies are national in scope. They include repair services, restaurants, specialized software companies, accountants, travel agencies, management consultants, and temporary help agencies.
  • Wholesale and retail trade. Retailers sell goods or services directly to the end user. Wholesalers link manufacturers and retailers or industrial buyers; they assemble, store, and distribute products ranging from heavy machinery to produce. About 85 percent of all wholesale firms have fewer than 20 employees. Most retailers also qualify as small businesses, whether they operate one store or a small chain.
  • Manufacturing. This category is dominated by large companies, but many small businesses produce goods. Machine shops, printing firms, clothing manufacturers, beverage bottlers, electronic equipment manufacturers, and furniture makers are often small manufacturers. In some industries, small manufacturing businesses have an advantage because they can focus on customized products that would not be profitable for large manufacturers.
  • Construction. Firms employing under 20 people account for about 90 percent of the nation's construction companies. They include independent builders of industrial and residential properties and thousands of contractors in such trades as plumbing, electrical, roofing, and painting.
  • Agricultural. Small businesses dominate agriculture-related industry, including forestry and fisheries. The Small Business Administration estimates that 99 percent of all agricultural firms have fewer than 100 employees.
The Typical American Small Business
Median number of employees3
Median annual revenues$150,000-$200,000
Average annual earnings of owner$40,000
Average hours per week owner works50.4
Percentage with Internet access47%
Percentage that maintain a web site35%
Source: "Profile of Typical U.S. Small Business Revealed", Business Wire (Feb. 18th, 1998)

Types of Small Businesses, By Industry
IndustryPercentage of All Small Businesses
Services39.2%
Retail Trade20.4%
Construction11.8%
Finance, Insurance, Real Estate8.0%
Wholesale Trade7.4%
Manufacturing 6.0%
Transportation, Public Utilities 3.9%
Agriculture, Mining, Other3.3%
Source: Office of Advocacy, U.S. Small Business Administration, as reported in Statistical Abstract of the United States, 188th ed. p. 548


Advantages of Small Business

Small businesses have advantages directly related to their size:
  • Greater flexibility. Because most small businesses are owner-operated, they can react more quickly to changing market forces. They can develop product ideas and market opportunities without going through a lengthy approval process.
  • More efficient operation. Small businesses are less complex than large organizations. They have fewer employees doing things that are not directly related to producing or selling the company's product (such as accounting and legal work). Thus, they can keep their total costs down.
  • Greater ability to serve specialized markets. Small businesses excel in serving specialized markets. Large firms tend to focus on goods and services with an established demand and the potential for high sales.
  • More personal service. Another advantage of small businesses is their ability to give the personal touch. In businesses like gourmet restaurants, health clubs, fashion boutiques, and travel agencies, customers place a high value on personal attention. Through this direct relationship with customers, the owner-manager also gets feedback on how well the firm is meeting customer needs.
Sources of Startup Funding

SourcePercentage Using
Owner's Personal Savings79%
Family Members16%
Partners14%
Personal Charge Cards10%
Friends7%
Bank Loans7%
Angel Investors5%
Mortgaged Property4%
Venture Capital3%
Other8%


Source: "The Inc. 500 Almanac" Inc. 500 (October 21, 1997), p. 28
Source: "The Future of Business", Copyright © 2000 by South-Western College Publishing Company