January 7, 2021 By SmartBiz Team

The term “small business” can be misleading. You might envision a startup with so few employees you can count them on your hands, but in reality, small businesses can have several hundred employees. When you think of just a handful of employees, you’re thinking of a microbusiness. Below, learn about the key microbusiness vs. small business distinctions, the challenges microbusinesses face, and some possible solutions to these obstacles.

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What is a microbusiness?

A microbusiness is a company that employs an extremely small number of people. The U.S. Small Business Administration (SBA) defines a microbusiness as a company with at most nine employees, company owners included. The SBA also notes that, in 2016, microbusinesses comprised 10 percent of private-sector jobs but nearly three-fourths of private-sector employers.

The SBA definition of a microbusiness is not the only one available. Other sources give different maximum numbers of employees and include additional criteria for distinguishing microbusinesses from small businesses. It may be useful to consider these additional definitions when comparing a microbusiness vs. a small business.

The differences between microbusinesses and small businesses

In comparing many microbusiness vs. small business definitions, the following differences arise:

  • Number of employees. In most instances, a microbusiness has at most nine employees. As previously mentioned, a small business can have as many as hundreds or even 1,000+ employees.
  • Earnings. According to one definition, a microbusiness’s annual sales and assets cannot exceed $250,000. A small business, on the other hand, can earn tens of millions of dollars in revenue.
  • Startup costs. According to another definition, a microbusiness’s startup costs cannot exceed $50,000. Most small business definitions do not include startup cost limits.

While not part of any microbusiness definition, business age may also be a factor. That’s because many microbusinesses eventually grow into small businesses – but not without overcoming some hurdles unique to microbusinesses.

Four challenges microbusinesses face

Since microbusinesses generate less income than do their small business counterparts, they may face the following challenges:

1. Affordably executing payroll

All employers must run payroll for their employees, but microbusinesses may struggle to justify spending on payroll software when they have so few employees to pay. Proponents of payroll software say it’s worth the cost to streamline payroll and minimize calculation errors, but if saving money is more important to your microbusiness, you may prefer to manually process payroll. See the SmartBiz Loans blog How To Pay Your Employees: 8 Steps to Process Payroll for a guide to doing so.

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2. Accounting for taxation

Microbusiness taxation does not differ from small business taxation. This means that if you register your microbusiness as a C corporation, you pay 21 percent of your corporate income as federal taxes. It also means that if you register your microbusiness as an S corporation, partnership, or sole proprietorship, you pay personal income tax rates on your company’s income, and these rates may be higher than corporate rates.

To understand why these tax rules impose challenges for microbusinesses, compare their theoretical revenue to that of a similar small business. If a publishing microbusiness that’s a C corporation earns $250,000 in a tax year and a publishing small business earns $1 million, the former will pay $52,500 in taxes, whereas the latter will pay $210,000.

Although the small business pays four times as much, it retains $790,000, which can cover significantly more costs than the $197,500 the microbusiness retains. And since both operate in the same industry, they ostensibly have similar costs to cover – but the microbusiness must do so on a much smaller budget.

3. Cutting costs while maximizing revenue

All businesses must cut costs while maximizing revenue, but given the outsize impact of taxes on a microbusiness, spending less while earning more is especially crucial. The good news is that, by definition, microbusinesses cost less to operate, as no microbusiness involves more than $50,000 in startup costs. The bad news is that reducing operations is much riskier for a microbusiness than for a small business, as limiting growth may hinder business success.

4. Growth

Given their small workforce, microbusinesses have only so much capacity. As such, growth can be challenging – how can your company earn enough to hire more people when your team is thinly spread? And recruiting can be tough too – some job candidates may see small businesses as more financially solvent and thus prioritize job offers from them over microbusiness offers.

Solutions to challenges unique to microbusinesses

Microbusinesses face unique challenges, but these obstacles aren’t insurmountable. The following options may help your micro business remain stable – or, better yet, grow:

  • Find out of the box ways to promote your company. Social media platforms’ advertising tools and pay-per-click ads are often more affordable than traditional marketing techniques.
  • Choose your software platforms carefully. Just because a platform is the gold standard for a business need doesn’t mean your company can afford it. Search for reputable but affordable (or free) options with the core functions your company needs – only use the expensive programs if you can’t operate without them.
  • Get the right team in your corner. If you spend money on employees and services that don’t satisfy you, then you’re right back at square one. Hire the right people and third-parties to maximize efficiency, spend money wisely, and put your microbusiness on the path to steady growth.
  • Obtain microbusiness loans. Microbusinesses may face more challenges finding loans than smaller businesses, but obtaining funding isn’t impossible. Search for lenders well-versed in SBA microbusiness loans to make the funding process understandable, fruitful, and hassle-free.
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