Have you ever dreamed of leaving the corporate life behind? Being a small business owner is an achievable dream for many people, and it represents the freedom to go your own way. In this article, we’re covering the basics on a small business model. We’re covering what a small business is, as well as the various types of small enterprise, business plan, and legal structures.
What is a Small Business?
First things first, what is a small business? Although the definition might seem obvious, it can be a bit more complicated than you might think. After all, where is the line between a small business and a medium-sized business anyways?
Although the definition does tend to vary, a small business is typically a privately-owned business, which can be either a partnership, a sole proprietorship, or a small company or corporation. The definition of a business size is typically based on a government classification in the country where the business is based. The government agency classifies business size by a small business size standard so that they can apply different tax policies to them.
In this article, we will examine the types of small businesses, as well as the different industries in which they operate. If you are thinking of starting a small business yourself, then this could be a useful guide.
How Big Can It Be?
As mentioned above, a small business is classified in terms of government regulations. This is mainly done for regulatory and tax purposes, which determines how a business will be treated under the law. However, just how big can a small business be? In America, the U.S. Small Business Administration classifies small businesses based on the industry in which they operate. This is due to the differences in operation with different companies, and the size required to operate a functional business. Some industries typically require more paid employees to start.
For example, a “small” business in the manufacturing and mining industry is under 500 employees, while in the wholesale trade industry, it is 100 employees. A “small” business in the general and heavy construction industry must not exceed $28.5 million average annual revenue, while in the retail and service industry, it must not exceed $6 million average annual revenue.
This means that if you are looking to start a small business, you need to be aware of the guidelines that apply to your specific industry, yourself, and any employee that you hire. These are very important for tax and regulatory purposes, and it goes without saying why these considerations are important for any small or big business.
Types of Small Businesses
In this section, we’re taking a look at the different types of small business. This includes the types of business from a legal standpoint, as well as the types of business based on the industries in which they operate.
First are the legal distinctions as to the ownership structure of the business. There are four major categories that apply to most small businesses:
First up is sole proprietorship. A sole proprietorship is basically a business which is owned by a single person. The sole proprietor has full ownership and full control of their business. If you start a business and don’t classify it as anything else, it will be assumed to be a sole proprietorship. Definitely the most basic type of business structure.
Sole proprietorships do not establish a new legal entity in the form of a business. The business, and its assets and liabilities, are seen as an extension of your assets and liabilities, thus meaning you can be held personally responsible for them. This makes it quite a simple business structure, but also somewhat risky.
Partnerships are a simple ownership structure if two people or more are looking to share ownership over a business. Basically, it splits the ownership between the different partners (or owners).
Partnership agreements can be limited liability partnerships (LLPs) or limited partnerships (LPs).
With LLPs, there is limited liability of each partner, which means that they will have protection against liabilities against the partnership, and also be protected from liability for the actions of other partners. With LPs, there is a single partner that will have unlimited liability. This means that this partner will be liable for many of the debts and actions of the partnership, but they will also tend to have more control over the company. The other partners will have limited liability.
A limited liability company (LLC) is a business structure which will protect the owner from personal liability for the company in most situations. This company structure helps to protect and separate your personal assets from corporate assets.
While less common as a small business, a corporation is a corporate structure in which the business is seen as a separate legal entity (basically as a legal person). A corporation will provide extremely strong protection to its owners against personal liability, but also require very extensive record-keeping and documentation. A corporation generally must be able to issue shares and must be formed to make a profit.
There are several other legal requirements, as well as different classifications of a corporation, but it is likely not that relevant to small business owners.
Of course, small business can operate in several different industries. You could start up a small business in any industry imaginable. Some of the most common types of small business include professional services (such as legal, accounting, marketing, and more), health services (medical, dental, physiotherapy, etc.), manual labor (cleaning, contracting, etc.), and online services. Of course, there are many other types of small business, and this list is really meant as more of a starter guide.
If you want to start a small business, investing in a white label and/or turnkey business that is both ready to go and can be branded however you want, is an easy way to become an overnight entrepreneur. We hope we have given you a comprehensive understanding of how small businesses are classified, as well as the different ownership structures that can be applied. The possibilities for starting a small business are quite endless, and there are many places to draw inspiration as an aspiring entrepreneur. Good luck on your business journey!