What Is a Microbusiness?
Definition and Examples of Microbusinesses
Microbusinesses, companies with fewer than 10 employees, are an important part of the U.S. economy, and they are the most common type of business in the U.S. As of 2016, America’s nearly 4 million microbusiness employers made up 75% of all private-sector employers and they provided over 10% of private-sector jobs.
Microbusinesses work like other small businesses, but they may have difficulty getting credit and funding for startup and expansion.
What Is a Microbusiness?
The Small Business Administration (SBA) defines microbusinesses as those that have 1-9 employees. You may see other definitions for different states or localities. For example, Vermont defines a microbusiness as one that employs fewer than five people and generates less than $25,000 in annual revenue. Other definitions of microbusinesses include sole proprietors with no employees.
Microbusinesses vs. Small Businesses
Think of a microbusiness as a subset of the term “small business.” The definition of a small business varies for different industries. In manufacturing, for instance, a small business is 500 employees or fewer, and for retail and service, it’s $6 million or less in average annual revenue.
The SBA sets a size standard for small businesses to qualify for government-backed loans and government contracts.
Types of Microbusinesses
Many microbusinesses are in the retail sector, construction, health care, and social assistance.
In addition, microbreweries can be considered microbusinesses, as they’re defined by producing fewer than 15,000 barrels of beer each year.
A growing number of states are associating the term “microbusiness” with cannabis-related businesses for licensing purposes. For example, California has a microbusiness license that allows the cultivation of cannabis and for businesses acting as distributors, manufacturers, or retailers.
How Does a Microbusiness Work?
Microbusiness start in the same way as other larger businesses, including
- Selecting a formal business legal structure, like an LLC, corporation, or partnership
- Setting up financial, marketing, management, and operations
- Getting business licenses and permits
If you are thinking about starting a one-owner microbusiness, consider starting as a sole proprietorship—the simplest business form. If you need a business loan, you may need to register with your state as an LLC or corporation.
Microbusinesses also operate the same way as other business types. They are taxed depending on the business type selected by the owner—sole proprietorship, corporation, partnership, or LLC—and must pay business income taxes, payroll taxes, sales taxes, property taxes, and other required state and federal taxes.
How to Get a Microloan for a Microbusiness
Small businesses, including microbusinesses, have a more difficult time getting loans for startup and expansion, in part because they have little capital (cash and other assets) to contribute, and also because traditional lenders typically don’t like to lend small amounts.
There are lending possibilities for getting a loan for your small business if you want a small amount of money (under $50,000).
The Small Business Administration (SBA) has a microloan program that offers loans of up to $50,000 for small businesses. It works with intermediary lenders (called microlenders), which are specially designated, nonprofit community-based organizations that administer the programs in addition to providing training and planning guidance.
You may also be able to get a small loan from a local bank or credit union, or from peer-to-peer lenders.
Microloans for Businesses in Certain Areas
Microlending has become an alternative to traditional lending for businesses in communities that don’t have access to traditional funding. Microbusinesses and small businesses that are in underserved areas or have low credit ratings can use private microlending organizations for:
- Inventory or supplies
- Working capital
- Payroll costs
- Seasonal expenses
- Marketing campaigns
The U.S. Chamber of Commerce has a list of private microlenders, most of them nonprofits, and others that loan to global businesses. Some, like Accion, make equity investments rather than loans.
State Help for Microbusinesses
Some states and organizations offer help for small and microbusinesses.
For example, Vermont has a Micro Business Development Program to help low-to-moderate-income Vermonters start and grow microbusinesses. They offer networking, resources, classes and workshops, and counseling.
Another example is a program set up by Mecklenburg County, Pennsylvania to help microbusinesses impacted by the economic downturn by offering up to $10,000 to qualifying businesses.
Some states offer a tax credit to microbusiness owners. Nebraska, for instance, gives an income tax credit of up to $10,000 based on “demonstrated growth” of the business over the past two years.
Check with your state and locality for loans specifically for microbusinesses and small businesses.
Pros and Cons of a Microbusiness
Ability to grow
More difficult to get loans
More difficult to bring on employees because it can't pay as much
- Microbusinesses are the smallest of small businesses, with only a few employees.
- Microbusinesses start and operate in the same way as other business types.
- Your microbusiness may be able to get a microloan from the Small Business Administration.
- If your business is in an underserved area, you may be able to get a microloan from an investment company.