Small Business Ownership

The US Small Business Administration (SBA) defines a small business as "an independent business having fewer than 500 employees." Regardless of how small businesses are legally organized (sole proprietorship, partnership, corporation, etc.), small business owners share the common desire to work independently. Such individuals must also possess great determination and persistence, as new business survival rates in the US make clear. The average five-year survival rate of new small businesses during the period 1994 to 2020 was 48.9 percent, while the ten-year survival rate was 33.7 percent.

Small business owners are risk-takers, who bet their own savings and money from family and friends on their idea. They are highly motivated self-starters. No job is too unimportant, and hours on the clock mean little to small business owners. They make decisions without running them past a board of directors, but they ought to be consulting occasionally with their banker, attorney, and accountant if no other mentors. They are idea generators, flexible but persuasive defenders of their dreams. They must be psychologically prepared to work alone until they can afford employees. Small business ownership requires being prepared to bear the full burden of financial loss, as well as the benefits of success.

Brief History and Background

The American spirit is founded on the shibboleth that it is a land of opportunity, where anybody can ascend the ladder of success. Small business ownership is the embodiment of the notion that a good idea, persistence, and hard work can lead to prosperity.

Small business ownership began during colonial settlement, when a London company granted fifty free acres of land to settlers. The population grew with this financial footing, and companies formed to meet their demands. Among the businesses founded in New England at that time were suppliers of fish, ships, and timber products, and businesses that sold furs, livestock, and alcohol. Small business ownership flourished in the Middle Colonies selling corn, wheat, beef, coal, and textiles. In the Southern Colonies, colonists built businesses to grow, process, and sell tobacco, sugar cane (imported), cotton, rice, and more. Employment grew exponentially as small businesses prospered. Home-based industries also succeeded as demand grew for homespun cloth, furniture, and distilleries.

African Americans and women were small business owners as well in early American history. They prospered despite racism, slavery, and misogyny taking hold in society’s institutions. Historian Juliet Walker in her book, The History of Black Business in America, presents data and conclusions demonstrating the importance of Black businesses to the commercial growth of the nascent nation despite little access to money from lenders and venture groups, credit, or entry into the heavy industries of manufacturing and retailing—both sectors that grew the economy exponentially and created great wealth for owners.

Thomas Jefferson attributed small business ownership as bulwarks against subservience and venality, and the means to realizing designs of ambition. Characteristics of virtue and independence were described by subsequent politicians as characteristics of small business owners. President Calvin Coolidge, in the 1920s, attributed the country’s burgeoning economy to the small business spirit, expressing "the business of America is business."

Small business ownership always depended on access to capital and credit. Leaders in the 1880s through the 1930s passed financial incentive and antitrust legislation to protect and embolden the small business environment.

Small Business Ownership Today

Small business ownership continued to thrive in the twenty-first century. Although the numbers of small businesses in the US declined during the Great Recession (2007–09), their numbers rose over the following decade. By 2023, the Small Business Administration (SBA) estimated more than 33 million small businesses were operating in the US. About 81.7 percent of those had no employees.

Small businesses are an important part of the American economy, but their role has declined in the twenty-first century. Their market share of the US gross domestic product was 57 percent in 1957, but only 43.5 percent in 2023. Here are some of the contributing factors tightening the reins on small business ownership:

• Service providers in medicine, law, janitorial services, and similar enterprises are consolidating or being subsumed into larger entities because of high operating costs like malpractice and liability insurance and employee benefit requirements.
• Technological innovations like online product sales and the rise of Amazon have hurt small brick-and-mortar retailers. Technology is also responsible for the demise of products and skills. Auto mechanics and repair shops must have sophisticated and expensive equipment to manage the computerized electronics and engines in today’s automobiles.
• Access to capital and credit from lenders is limited. Small business owners have to pledge all their assets (house, cars, bank accounts, etc.) to get a bank loan, and still banks are not making loans to small business owners in the twenty-first century in the numbers they did in the twentieth century. Lenders are fearful because the survival rate of new businesses is quite low.
• Small business ownership suffers from a generation gap. A majority of young people with postsecondary degrees enter the workforce and business world with student loan debt. Their access to borrowed money is limited, and they cannot wait for a small business to take off before they must start repaying student loans.

According to the SBA, small businesses generated over 62 percent of new jobs created in the United States from 1995 to 2021. In 2023, 61.7 million workers, or 46.4 percent of the private sector workforce, were employed by small businesses. Moreover, some 99.9 percent of all businesses are defined as small businesses by the government. Typical businesses in this category include barber shops and beauty salons, tutors and music teachers, neighborhood hardware stores, small construction firms, restaurants, and web designers.

As in the Great Recession, small businesses experienced significant losses during the COVID-19 pandemic that began in early 2020 and the resulting recession. For instance, in Q2 of 2020 alone, more than 8.6 million small business job losses occurred in the US. Small businesses experienced many challenges, including hiring shortages and supply chain disruptions. However, as the economy recovered from the pandemic, small business employment rapidly increased. Even so, some businesses continued to be negatively impacted by the pandemic into the 2020s, particularly the accommodations and food service industries.

Small business owners have increasingly adopted emerging technologies in the twenty-first century. Many have turned to the internet to raise money for start-up businesses, avoiding traditional lenders. Crowdfunding is a popular means of raising investment capital. Small business owners are leveraging their tech-knowledge using digital marketing, apps, and social media to sell with little added expense beyond the confines of their neighborhoods. Further, increasing numbers of small businesses use specialized software and cloud-based computing in their day-to-day work.

Bibliography

Conte, Christopher. "Small Business in U. S. History." Entrepreneurship and Small Business, edited by Jonathan Schaffer, US Department of State, 2006, pp. 6–9, usa.usembassy.de/etexts/bus/ijee0106.pdf. Accessed 9 Oct. 2024.

Fielden, Sandra L., and Marilyn J. Davidson (editors). International Handbook of Women and Small Business Entrepreneurship. Edward Elgar Publishing, 2005.

"Frequently Asked Questions." US Small Business Administration, Mar. 2023, advocacy.sba.gov/wp-content/uploads/2023/03/Frequently-Asked-Questions-About-Small-Business-March-2023-508c.pdf. Accessed 9 Oct. 2024.

"General History." Colonies in America: Commerce, Business, and the Economy, Library of Congress, 23 Sept. 2024, guides.loc.gov/colonial-america-business-research/general-resources. Accessed 9 Oct. 2024.

Gerber, Michael E. The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It. Harper Collins, 2004.

Leppert, Rebecca. "A Look at Small Businesses in the U.S." Pew Research Center, 22 Apr. 2024, www.pewresearch.org/short-reads/2024/04/22/a-look-at-small-businesses-in-the-us/. Accessed 9 Oct. 2024.

Seth, Shobihit. "Entrepreneur and Entrepreneurship: Definitions and Examples." Investopedia, 7 June 2024, www.investopedia.com/articles/investing/092514/entrepreneur-vs-small-business-owner-defined.asp. Accessed 9 Oct. 2024.

Walker, Juliet E. The History of Black Business in America: Capitalism, Race, Entrepreneurship. UNC Press, 2009.