What Is a Small Business Anyway?

Small businesses come in many sizes, from one-person, home-based businesses to firms with hundreds of employees and office space. When researchers lump together the performance statistics of a one-person business with a firm that has 500 employees on its payroll, the mixed data can really distort research results.

So says a new working paper (pdf) by the Small Business Administration's Office of Advocacy: "Do Business Definition Decisions Distort Small Business Research Results?"

The paper says that pooling data on nonemployer firms and employer firms "creates hazards in results and interpretation. And using one group to deduce results for the other group or the group as a whole also poses logical problems."

Because nonemployers represent three out of four businesses, business studies that lump together both nonemployer and employer businesses will tend to produce results that reflect trends of nonemployers because they outnumber employers by such a wide margin.

The authors of the paper looked at data from the U.S. Census Bureau, which defines a nonemployer business as having at least $1,000 in annual receipts and an employer business as reporting any payroll during the year at any of its business locations.

Nonemployers experienced high growth rates from 1992 to 2005, while employers and the self-employed grew at lower rates. From 1997 to 2002, nonemployers and employers combined experienced a decrease in average receipts per firm, but when taken as separate groups, they both had receipt increases. The reason for the discrepancy is that the number of nonemployers grew faster than the number of employers.

Fifteen percent of nonemployers were new businesses in 2002, compared to just 5 percent of employers. The researchers attribute the difference to the fact that nonemployers face lower barriers to starting a business than employers do.

Other findings from the study include:

*Nonemployers tend to rely more heavily on credit cards while employers were more likely to take out bank loans.

*Employers were more likely to be franchises and less likely to be home-based than nonemployers.

*Employers were single owners 38.5 percent of the time, while 59.5 percent of nonemployers were solo owners.

Some of the differences, according to the working paper, can be attributed to the mix of industries represented in each group. Employers tend to be represented more in the manpower-intensive manufacturing industry, while nonemployers are heavily represented in real estate and services.

By Sharon McLoone |  August 15, 2008; 9:13 AM ET Data Points
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The SBA continually looks at business size by NAICS with the usual intent and result to increase the size in each NAICS. However, the SBA should consider decreasing the size of NAICS for small businesses especially in the manufacturing sector and aerospace component repair areas. Small businesses with these skill sets tend to average about 50 employees each; yet the small business size for more manufacturing is 500 or 1000 employees. It doesn't seem fair to make a true small business, a firm with 50 or 60 employees compete against a firm with 500-1000 employees. A firm with 500 or more employees is not a small business.

Posted by: Phil Bail | August 15, 2008 11:52 AM

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