Small businesses fall into two categories: those with employees and those without employees. The SBA’s Office of Advocacy has released information describing the latter category, termed nonemployer businesses. It sheds light on what these businesses are like and how they contribute to the economy. The following is excerpted from this release.
Nonemployer businesses
These are businesses with no paid employees. Four out of every 5 businesses in the U.S. fall into this category, and the numbers are rising: 15.4 million in 1997 to 24.3 million in 2015 (the last year for these statistics). The release does not explain why this is so, but in my view the gig economy is responsible for at least some of the growth in nonemployer businesses.
Nonemployer businesses create their own “paychecks” for owners. These businesses are the primary source of income for 40% of their owners. And they provide income for the other 60%.
Compared to employer owners, the owners of nonemployer businesses are younger and more diverse in terms of race, ethnicity, and gender. Sixteen percent of nonemployer businesses are owned by those under age 35 (compared with just 7% of employer businesses). Thirty-two percent of nonemployer businesses are owned by minorities (compared with 18% of employer businesses) and 40% by women (compared with 20% of employer businesses).
What nonemployer businesses do
Nonemployer businesses appear in practically every industry. They are most concentrated in industries like performing arts and passenger transportation. Some industries listed by the release: museums and hobby shops; provide pet care and dating services; manufacture clothing, electrical equipment, and machinery; sell real estate; process data.
Nonemployer businesses account for just over 3% of the annual receipts of U.S. businesses (employer firms account for the remaining 97%). (According to the Economic Policy Institute, this percentage hasn’t changed much since 1997.) On average, nonemployer firms earn about $47,000 annually while on average employer firms earn nearly $6 million.
Owners of nonemployer businesses spend considerable time at work:
- 20% work between 20 and 40 hours
- 30% work at least 40 hours
- 50% work less than 20 hours
Startup capital
About one-third of nonemployers report that they do not need startup capital (there’s no significant startup cost to driving for Uber). But of those who do, 79% use their own money or help from families. Other sources of capital: home equity loans, credit cards, business loans, and venture capital.
Bottom line
While nonemployer businesses may not be dramatically important to the U.S. economy, they are vital to their owners and families. Through these businesses, owners make a living or supplement a paycheck. And they are important to local communities, representing your local CPA, travel agent, handyman, and more. Most significant, they are a gateway to becoming employer firms.
