Jul 05 2012

The Rise of Nonemployer Small Businesses

Solopreneurs and independent contractors are behind the booming trend.

What does small business mean to you? Does labeling yourself as a small business mean you must hire employees? Does a small business count if it’s a party of one?

Steve King of Small Business Labs dissects a few of these questions in a recent blog post.

In his article, he outlines three kinds of nonemployer businesses, what he refers to as personal businesses. They are:

Job Substitutes: Businesses that are started to replace income from a traditional job. This may or may not be a temporary situation. Freelancers and independent consultants fall into this group.

Part Time/Hobby: Businesses that are started as a side gig, done in the worker’s free time. These businesses are usually created to supply the business owner with supplemental income.

Small Businesses Without Traditional Employees: Businesses that are started with contractors, outsourced resources and more. Once they mature, these endeavors often evolve into employer businesses.

The question is, do all three business types count as small businesses? Steve King says yes, but they should be treated differently.

Personal businesses that are job substitutes or part-time/hobby businesses behave very differently than employer small businesses. Because of this, in our corporate consulting work we strongly encourage our clients to treat the job substitute and part-time/hobby personal businesses as very different segments than employer small businesses.

So in that sense, we agree with Scott that they shouldn't count as traditional small businesses.

This doesn't mean these businesses aren't important — they are, both to the owner and the U.S. economy. It just means they behave differently than employer small businesses.

We also advise our clients to treat true small businesses without employees like the employer small business segment. These firms behave much like employer businesses — and they often effectively have employees through their use of contingent workers. So we think this group should be counted with employer small businesses.

In many fields, business owners are finding that working without traditional employees is the best way to grow in resource-strapped climates.

Did you start your business as a personal business and evolve into an employer business?