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What is the difference between a microbusiness and a small business?

Posted by Shivali Anand

December 22, 2021    |     4-minute read (684 words)

Did you know that if your company operates on a very small scale, it might be classified as a microbusiness rather than a small business?

According to the Office of Advocacy of the U.S. Small Business Administration, a small business is defined as one with fewer than 500 workers, with several exclusions and clarifications. A book publisher, for example, may have up to 1,000 workers and yet be classified as a small business. But the microbusiness subcategory is much smaller than 500 employees. 

What is a microbusiness? 

Per the SBA, a microbusiness is a company with one to nine employees, including the owner. Common examples of microbusiness owners are photographers, housekeepers, professional service providers, event planners, consultants and freelancers in any sector and those operating in the gig economy, such as Etsy store owners, Uber drivers and Airbnb hosts, are examples of microbusiness owners.

All microbusinesses are small businesses; they constitute a subgroup of small enterprises based on the total employee count. As a result, if your firm employs less than nine individuals, it is considered a microbusiness, although some definitions restrict the number of employees to six.

Microbusinesses encounter distinct constraints

The distinction between a small business and a microbusiness means that the latter operates with minimal business activity, receipts and employees. While this distinction may not appear too significant, there are a few things to consider if you run a microbusiness.

These guidelines also help determine whether your business is small or micro:

  • If your business requires less than $50,000 to start.
  • If your company does not have access to traditional capital loans. 
  • If you have less than $250,000 in sales.
  • If you are self-employed, are a sole proprietor or have no employees.
Since microbusinesses can also be categorized as small businesses, the latter are generally defined as for-profit organizations that are independently owned and operated but do not dominate their local market or industry. 

What distinguishes a microbusiness from a small business? 

Even though microbusinesses are technically small businesses, differentiating between the two is important when launching and running a small enterprise. Identifying as a microbusiness owner can help you better grasp the obstacles you’ll likely encounter while running your firm. These problems will not be the same as those faced by a larger business owner, which implies that the solutions will differ.

Roughly 92% of all U.S. businesses are microbusiness. Yet these businesses don’t receive a lot of attention in regard to their significance in the overall landscape. 

Some of the unique challenges faced by microbusinesses are:

  • Difficulty attracting skilled staff due to limited exposure.
  • Microbusinesses do not have the same client reach as their larger counterparts, also due to limited exposure.
  • Traditional financial institutions may be reluctant to lend to these businesses.
  • Due to their higher risk of default, microbusinesses have a harder time establishing lines of credit with vendors.
It's not all horrible, though! A microbusiness will have different operating goals than a bigger business so its operating expenses will be lower. As a result, a microbusiness owner's primary objective should be to grow revenue. While most firms aim to trim costs, the microbusiness’s costs are likely to be low already.

Outsourcing may be beneficial

If a microbusiness owner chooses to run their venture as a sole proprietorship, they will be taxed at their personal tax rate. Most microbusiness owners adopt this structure because it is easier to register and file paperwork. Still, the business structure they choose for their microbusiness, or any small business for that matter, affects how their taxes are assessed.

Further, many small businesses that register as a corporation or as an LLC find their taxes get assessed at a corporate tax rate rather than the personal tax rate used by many microbusinesses.

Microbusinesses may employ a small number of employees, but not enough to justify in-house payroll, HR or accounting staff. However, they must conduct payroll functions that comply with payroll taxes, corporate taxes and governmental fiscal policies. This makes outsourcing to an independent firm specializing in payroll and accounting an attractive option for microbusinesses.

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