Ever Heard of a Micro Business? What Is It, and How is It Different from a Small Business?
Updated: Aug 30, 2021
[Authored by Sally Lauckner, Originally printed by Fundera.com. Published with Permission.]
If you’ve started a business, you probably identify as a small business owner, but are you actually a micro business owner? Solopreneurs, freelancers, side hustlers, and business owners in any industry employing fewer than 9 people would qualify as the latter.
If that’s the case for you, it’s important that you understand what a micro business is, the difference between a micro business vs. small business, and the challenges and opportunities unique to this subset of small businesses. That way, you can better understand how to operate your business effectively, and how to navigate those inevitable challenges.
What Is a Micro Business?
Despite their small size, micro businesses have considerable clout in our economy. According to U.S. Small Business Administration Mid-Atlantic Acting Regional Administrator Steve Bulger, “Micro businesses are the foundation of the creation of our nation, and continue to be an important part of our economy and the strength of our communities. Many of our founding fathers and early Americans could be considered micro business owners, and as more Americans become self-employed, micro businesses have grown to be a significant sector of our small business economy.”
A micro business is a type of small business that operates on a very small scale. That scale is typically measured according to the business’s number of employees, total worth, and occasionally how much money was required to start the business. These factors are also used in the SBA’s definition of a small business, but of course the numbers are smaller in this case.
“By definition, micro businesses are a subcategory of small business, with sales and assets valued at less than $250,000 per year and less than five employees, including the owner,” Bulger says.
Those numbers can vary slightly. But according to other studies on micro business, as well as the micro business owners and SMB experts we spoke to, we’ve found that micro businesses generally meet the following standards:
Have fewer than 10 employees, including the owner (though some definitions of “micro business” cap the number of employees at six)
Less than $250,000 in annual sales
Required less than $50,000 to start
More generally, micro businesses require less capital to operate and their business activity is lower than larger small businesses.
Often, micro businesses are run by a single owner with no employees, aka solopreneurs. These tiny operations often begin, and/or remain, as the owner’s side hustle—think housekeepers, consultants, creatives, event planners, professional service providers, freelancers in any field, and people working in the gig economy, like Uber drivers, Etsy store owners, and Airbnb hosts. A micro business “may also carve its own space within an industry by focusing on a specific sector of the market,” says Thomas J. Williams, a tax accountant and founder of Deducting The Right Way. “For example, a member of the food and restaurant industry who sells muffins from a street cart rather than opening a full-fledged bakery” would be defined as a micro business owner.
Some micro businesses are simply early-stage small businesses (or, eventually, large enterprises) that will grow over time, while others will remain micro businesses over the lifespan of the company. That all depends on the business owner’s intention and opportunity for growth.
Despite their smaller scales and requirements, micro businesses are just as viable as small or midsize businesses, and they certainly require the same amount of planning, dedication, and work to operate as larger-scale enterprises. “Together, we contribute just as many jobs as large corporations, and we are often involved in our communities at equivalent levels,” says Nance L. Schick, a small business attorney and micro business owner. “Yet our financing, training, education, workforce, and other needs vary dramatically. Many of us are home-based business owners who generate significant incomes; we are not just hobbyists.”
Micro Business vs. Small Business Tax Structures
Another potential difference between “micro business” and “small business” is how the business in question is taxed, which in turn is dictated by the type of business entity they’re registered as with their state.
Often, small businesses register as LLCs or corporations, as these entity types provide the business owner with personal liability protection. LLC owners can choose whether they want to be taxed as a corporation or a pass-through entity, but corporations are always taxed as corporations (of course!).
Alternatively, most micro businesses function as sole proprietorships, which don’t actually require registration with the state—if you start a business as its sole owner, then you’re automatically a sole proprietor under the law. Sole proprietorships are taxed according to the owner’s personal tax rate. Filing taxes as a sole prop is simple—you’ll just fill out and include a Schedule C form with your personal income tax return. As a sole proprietor, you can also deduct your business expenses on your personal tax return, so it’s especially important that you keep their business and personal expenses separate throughout the year.
However, micro business owners who start out as sole props always have the option of registering as a separate entity. LLCs are the most common type of business entity for individual owners, as registration is easy and relatively low cost. LLCs also require very few ongoing requirements, you’ll be provided with the personal liability protections that sole proprietorships don’t have, and you can choose to be taxed at a corporate tax rate.
3 Major Challenges That Micro Business Face—And How to Solve Them
Other than their size, scale, and tax rate, micro businesses can be more loosely defined according to the particular challenges they face. Here, we’ll run through a few of the common challenges that micro business owners encounter, plus our recommended solutions for these snags.
Challenge #1: Securing Small Business Financing
While securing business financing isn’t necessarily easy for businesses of any size, it’s harder for micro businesses to obtain capital loans than even the smallest of definitively “small businesses.” Whether the loan is issued by a traditional bank or an online platform, lenders seek to mitigate risk wherever possible. And as micro businesses operate on such small scales financially, lenders typically view these tiny operations as less stable—and simply less able to handle debt—than larger small businesses are.
Beyond traditional capital loans, like term loans and lines of credit, micro business owners may have trouble securing financing from outside investors, as well. According to Schick, “Our financing needs might be nominal and only occasional, [but] we might be restricted from accepting investments from owner-funders outside our industries.”
The Solution: Seek Alternative Financing
Micro business owners in need of operational or startup funding will likely need to cast a local net rather than approaching a bank or alternative lender. Often, micro business owners dip into their personal savings, apply for a personal loan for business, turn to family and friends for loans, or seek crowdfunding to collect their required capital. Since micro businesses typically require small amounts of cash to operate, however, these alternative funding methods can be perfectly sufficient for addressing their needs.
Challenge #2: Attracting potential customers
Micro businesses operate on smaller scales than small businesses on every level, including the scope of their customer base—and their ability to reach potential customers in the first place. That might put them at a competitive disadvantage to small businesses that have the funds, network, and resources to access fuller-scaled marketing campaigns. Simon Braier, the customer strategy and insights director at Vistaprint, confirms this challenge:
“In a Vistaprint survey of micro business owners, we discovered that marketing is one of the areas they struggle with the most. Many micro business owners start out to spend more time doing what they love, rather than due to a passion for marketing. They also wear many different hats and work within the constraints of a tight budget (approximately $1,500 annually), which makes this area even more challenging.”
Despite these limitations, Braier says, “We’ve seen that even with limited resources, micro business owners can stand out on a shoestring budget. In fact, their small size and unique qualities can be turned into a strength in their marketing toolkit.”
The Solution: Stick to a Low-cost, Low-lift Marketing Plan
Thanks to the rise (and effectiveness) of social media marketing and other forms of digital advertising, business owners don’t actually need enterprise-level marketing budgets to get the word out about their businesses. The democratization of online marketing means that most digital marketing tools are easy and intuitive to implement, too, which makes them ideal even for the technophobes among us. Of course, it’s important for micro business owners to put in some face time with their potential customers, too.
We’d recommend that micro business owners implement at least the following marketing strategies, none of which require supersized budgets or bandwidth to achieve:
1. Business Website
Micro business owners—like business owners helming enterprises of any size—should create a business website as soon as they launch.
There are lots of website-building platforms to choose from, but Squarespace and Wix are two of the more popular options for their easy-to-use templates, professional designs, and affordable price points. Importantly, too, these platforms enable you to buy your website domain name.
Both Squarespace and Wix’s templates are also built-in with SEO features, which will help you rank higher on search engines—and which, in turn, makes your business more easily visible to potential customers seeking products or services like yours. We’d also recommend taking a look at our guide to SEO strategy for more tips on how best to create your digital content so it reaches the most possible digital consumers.
2. Social Media Marketing
Next, create dedicated business accounts across all major social media platforms. Regardless of your business or industry, maintaining a presence on both Facebook and Instagram is basically required these days. But depending on where your target market hangs out online, plus your personal bandwidth and preferences, you might also consider creating accounts on Twitter, Pinterest, YouTube, TikTok, and other popular social media sites.
Our comprehensive social media marketing for small business can help you navigate this crucial and highly effective marketing tactic. But the most important tips to keep in mind as you’re building your social media channels are to create high-quality content, post regularly, and respond (kindly!) to as many of your customers’ comments and questions as possible. Highly engaged users tend to be the most successful. If you have room in your budget, you can also consider buying sponsored posts and taking advantage of other paid marketing tactics.
Don’t be discouraged if your digital fanbase starts out small—Braier believes that a micro business owner’s relatively small social media following can actually work in their favor, as it allows for more (virtual) face time with more people.
“A restaurant or shop owner can replicate the higher personalized level of service they provide face-to-face on social media, by monitoring and responding to comments in a customer-centric way. These businesses can also differentiate themselves by showcasing the quality products and services they provide that are hard to come by at larger competitors. For an arts-and-crafts manufacturer, that could consist of videos showing the meticulous process they go through when creating their products.”
As a micro business owner, you’re likely going to find your customers through your personal connections and your local community, so don’t overlook the importance of networking and in-person marketing incentives. That can certainly entail old-school networking tactics, like serving your family and friends and letting word-of-mouth work its magic. Partnering up with local businesses and charities or setting up shop at crafts fairs or farmers markets are great options, too. And don’t forget to have business cards and other physical marketing materials on hand.
“Believe it or not, business cards—as well as palm cards, flyers, and other printed marketing material—are still an excellent marketing method. They distribute easily, are relatively inexpensive, and printing on demand can make your materials as flexible as your online presence,” Bulger says.
But networking can be digitized, as well: Send an email announcing your business to your address book, update your LinkedIn page to include information about your business, and post about your business on your personal social media accounts to redirect your followers to your business’s accounts.
Also, don’t forget to create a Gmail for business account, or an account on the email server of your choice. Having a professional email account looks more professional, and separating your business and personal emails makes more sense organizationally.
Challenge #3: Handling several jobs at once As we mentioned, micro businesses are loosely defined as businesses with fewer than 10 employees, including the owner. More often than not, micro businesses are actually owned and operated by a single person.
While this pared-down staff may be the business owner’s choice, in some cases micro businesses remain “micro” only because they lack the funds to hire more employees and obtain other resources. “Bootstrap budgets often lead to giving up much-needed resources, such as hiring part-time instead of full-time help or waiting to buy essential equipment,” Williams says.
Of course, fewer (or zero) staff members means fewer (or zero) people to delegate your work to—which can be overwhelming, to say the least.
“Where training and education is concerned, we are often excellent at creating the products or services we sell, but we might need very basic skills in bookkeeping, finance, human resources, marketing, operations management, sales, and taxes. It is not unusual for one person to be the de facto CEO, CFO, CIO, CMO, COO, and more in our businesses,” Schick says.
Jason Thibault, the owner of micro business Massive Kontent, adds that juggling all these roles can take as much of a toll on a solopreneur’s personal life as it does on their business: “I now wear the hats of a consultant, strategist, content creator, and analyst. Where I previously was part of a team who shared the workload, I now perform all of the required tasks or outsource the remainder to subcontractors. A well-structured small business has the benefit of a sales and marketing team, accounts payable/receivable, general manager, and possibly someone handling IT. Vacations can be scheduled appropriately with temporary replacements. The sole proprietor of a micro business is responsible for keeping the customer pipeline full, timely invoicing, client satisfaction, all while maintaining their health as sick days aren’t an option.”
The Solution: Outsource Tasks to Digital Tools Micro business owners may not have the option of delegating roles to human employees or subcontractors, but there are a wealth of digital tools that can automate and streamline most tricky, time-consuming tasks. In particular, we’d recommend that micro business owners consider the following types of software:
1. Business Accounting Software One of the most common challenges micro business owners face is a lack of available funds (that limitation is literally baked into the definition of a “micro business”). “Micro businesses have much smaller budgets, overheads, and profit margins than small businesses and may benefit from (or more commonly, lose out to) the tax and deductibles implications of this,” Moss says.
To mitigate this challenge as much as possible, it’s important that micro business owners create a business budget and stick to it fairly militantly. It’s also crucial to track all your sales and expenses, and note any tax-deductible expenses. This is exactly where a good business accounting software comes in handy.
Depending on your needs, software from trusted digital accounting platforms like QuickBooks, FreshBooks, and Xero can help you track your sales and expenses, perform bookkeeping tasks, and calculate and file business taxes. Some platforms can automate additional tasks as well, like inventory management, time tracking, invoicing customers, and handling payroll. Alternatively, you might choose to use dedicated payroll software and/or invoice software, depending on your particular needs.
2. Appointment Scheduling Software Service-based business owners should definitely look into appointment scheduling software. Outsourcing your booking management to a digital platform will help you save valuable time, of course, but booking online also makes the process much easier for your customers, which can make them more inclined to book with you again. Most appointment scheduling platforms are equipped with extra features, too, like payment processor integrations, storing customer information and booking history, and sending your clients automatic appointment reminders. Plus, all booking software enables integrations with your business website and social media accounts to provide your customers with a seamless booking experience.
3. Project Management Software If you’re handling several projects or accounts at once (which we hope is the case!), then you might want to look into a project management tool. Platforms like Asana, Trello, and other productivity-boosting tools help you and your team (if you have one) visually organize your tasks and to-do lists to ensure that nothing falls through the cracks.
And to truly streamline your processes, consider a comprehensive toolkit like Bonsai Freelance. This all-in-one freelancer platform is equipped to handle most administrative tasks, including creating and sending proposals and contracts, time and expense tracking, creating and delivering invoices, and receiving payments via credit card, ACH payment, PayPal, or bitcoin.
Why It’s Important to Define Micro Business vs. Small Business While micro business owners technically are small business owners, differentiating between micro business vs. small business is important to keep in mind as you launch and operate your small enterprise. Identifying as a micro business owner will help you better understand your particular challenges and requirements which will likely differ from a larger small business owner’s, which means your solutions will differ, too.
And remember that your size certainly doesn’t affect your business’s quality, clout, and opportunity to grow—it simply operates on a different scale than a small business. “In short, lumping all businesses up to 250 or 500 employees into one category is a lot like lumping everyone 65 and older into one. We end up overlooking a lot of unique needs—and opportunities,” Schick says. Article Sources:
SBA.gov. “Steve Bulger“
SBA.gov. “The Role of Microbusiness Employers in the Economy“
Many thanks to Ms. Lauckner and Fundera for the permission to share this article.
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