Small businesses shape how our communities work and grow. You see it every day. When you look at the most common types of small businesses, you start to see how much they influence the economy and how much room they have to grow.
| Credibly Co-Founder Ryan Rosett states, “Every big business was once a small business. With the right strategy and the right funding, nothing should be holding you back.” Small businesses are essential to the nation’s success, and they make up a large portion of the driving economic force in America. |
If you are ready to begin your entrepreneurial journey, this guide is here to help you. We will discuss what constitutes a small business and explore common business models and types of small businesses. Finally, we will detail the key factors you should consider when choosing your own business structure.
What is a small business?
A small business is a privately owned company that operates on a smaller scale compared to corporate entities.
The size definition can vary by country, but the U.S. Small Business Administration (SBA) generally defines a small business as one with fewer than 500 employees (except for wholesale, which has a threshold of 100 employees) or based on revenue. The SBA’s revenue thresholds vary based on industry.
Here are some examples.
- Professional, scientific & technical services: $19 million – $47 million
- Construction: $45 million – $51 million
- Retail: $9 million – $41 million
- Finance & insurance (non-bank): $23.5 million – $47 million
- Agriculture & forestry: $3 million – $4 million
- Transportation & warehousing: $34 million – $47 million
What constitutes a small business vs. a mid-sized one?
While there is no universal rule, a small business generally has fewer than 500 employees or a lower revenue (as discussed above). Like the definition of “small”, the definition of “mid-sized”, “large”, and “enterprise” will vary based on your country and industry.
Still, most private-sector frameworks start labeling businesses “large” or “enterprise” between 1,000 and 2,500 employees. So, by this definition, a mid-sized company would be approximately 500-1,000 employees.
Why do small businesses matter to the economy?
Small businesses play a vital role in the U.S. economy. They employ about 45.9% of all American workers and created 55% of net new jobs between 2013 and 2023, according to the U.S. Bureau of Labor Statistics. Since the pandemic, they have driven much of the nation’s job recovery, contributing about 71% of total job gains.
Small businesses are also a major source of innovation and competition. They often explore new markets, develop emerging technologies, and bring products to life faster than larger corporations. On a per-employee basis, small firms tend to produce more patents, and their presence promotes healthy competition in local and national markets.
Their activity stimulates surrounding economies through what economists call the “local multiplier effect,” meaning money spent at local businesses often circulates within the community through wages, supplier payments, and local services.
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Common types of small business models & industries
1. Home-based businesses
Home-based businesses offer the unique advantage of merging your workspace with your living space, allowing for a better balance between personal and professional life.
While these businesses offer flexibility and lower overhead costs, it’s important to maintain a distinct boundary between work and personal life, manage time effectively, and adhere to any zoning laws or homeowner’s association rules.
2. Franchising
Franchising allows you to capitalize on the proven success of established brands. When you buy a franchise, you’re buying the rights to use a specific business’s brand, processes, and business model.
It’s a way to start a small business with a roadmap already in place, reducing some of the risks associated with starting a business from scratch. However, it’s crucial to research thoroughly and understand the financial commitments, as franchising involves upfront fees and ongoing royalties.
3. Online
Online businesses have become increasingly popular. They offer vast market reach, operate 24/7, and generally require lower startup costs. However, they come with challenges such as high competition, technical difficulties, and the necessity of building a strong online presence.
4. Consulting and freelancing
Consulting and freelancing businesses allow you to capitalize on your expertise and provide a service based on your knowledge and skills. They provide the flexibility to choose projects, clients, and work hours, and they often have lower overhead costs.
The challenge is that you must consistently find your own clients, manage your business, and find creative ways to stay relevant in your field. Your success will largely depend on your ability to market your skills, build a strong reputation, and manage your time effectively.
5. Brick-and-mortar businesses
Brick-and-mortar businesses operate from physical locations such as shops, cafes, and boutiques. They offer personal interaction with customers, build local recognition, and provide a hands-on experience that online stores cannot match.
These businesses often require significant startup costs for rent, equipment, and inventory. Success depends on location, consistent foot traffic, and effective inventory management, along with strategies to compete with online alternatives.
6. Service-based businesses
Service-based businesses focus on providing expertise or labor rather than selling products. Examples include cleaning, plumbing, landscaping, and repair services. They typically require less initial investment and allow owners to build direct relationships with clients.
Growth depends on skill quality, reputation, and reliability. While these businesses can expand through referrals and repeat customers, they may also face challenges in scheduling, staffing, and maintaining consistent service standards.
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How to choose the right type of small business for you
1. Set your personal goals and limits
Start by writing down what you hope your business will deliver in your life. Ask yourself:
- How much income do I need each month (after business costs) to support myself and my family?
- How many hours per week can I commit without burning out?
- What’s the maximum financial risk I’m comfortable taking (e.g., investing savings, taking a loan)?
- What sort of lifestyle do I want? Do I want flexibility? Travel? Work-from-home?
- When do I want to see results (e.g., breakeven within 12 months, profit by year two)?
Once you have clear, numerical goals and limits, compare them against potential business ideas. For example, if you can only devote 10-15 hours per week, skip ideas that demand full managerial oversight or 24/7 operations.
By forcing yourself to put real numbers to your hopes and limits, you instantly weed out business ideas that don’t match your life. That way, the ideas you pursue align with you, not just your ambition.
2. Compare demand vs. real data
Check if customers exist where you plan to sell. Use the Census Business Builder to view local population, income, and industry data in your target region. You can also review the Business Trends and Outlook Survey for current conditions by sector and metro area. Match what you sell to where demand is strongest.
3. Study competitors in your niche
You must know who you compete against and how you’ll be different. To figure that out, follow these steps.
- List direct competitors (same product or service), and indirect ones (alternatives your customers might use).
- For each competitor, note their strengths, weaknesses, pricing, and quality through customer reviews, marketing channels, and brand image.
- Ask: What can you do better? Faster delivery, better quality, local focus, customization, subscription models, bundling, stronger branding, etc.
- Ensure your niche is narrow enough to differentiate but broad enough to sustain a customer base.
By positioning yourself clearly against existing competitors, you lower the risk of creating a business that blends in or offers nothing unique.
4. Choose a business model you can sustain
Pick a model that matches your resources, goals, and growth ambitions. For instance, if you’re starting from scratch instead of buying a franchise, you will need to factor in high work and capital. Try to balance your ideal situation with what you can realistically sustain and scale over time with the time and resources you have.
5. Pick a legal structure that fits your risk tolerance
Your legal structure should match the level of financial and personal risk you accept. Choosing the right structure affects your taxes, liability, and future growth. Take time to get it right from the beginning.
Key business legal structures you should know:
1. Sole proprietorships
A sole proprietorship gives you full control over your business. It is the simplest business form to set up and manage, which makes it popular for new entrepreneurs. Note that there is no distinction between you and the business. This means you are personally liable for the business’s debts and liabilities.
2. Partnerships
Partnerships bring two or more people together to share responsibilities and rewards. This structure allows you to pool resources and talents, making your business more robust. Partners are jointly and individually liable for the actions of the others, however. Clear communication and trust are crucial for success.
3. Limited liability companies (LLCs)
LLCs are a popular choice for small business owners. They combine the liability protection of a corporation with the operational flexibility of a partnership. The owners’ personal assets are protected from most business debts and liabilities. An LLC can have one or multiple owners, known as members.
4. Corporations
Corporations offer the strongest protection from personal liability. However, they are more complicated and costly to set up and run. A corporation is a separate legal entity with its own rights and liabilities. This structure also allows for easier transfer of company ownership if needed.
5. Cooperatives (co-ops)
Cooperatives are unique because they are owned and operated by the members who use their services. They operate democratically, giving each member an equal vote in decision-making. They require careful planning and strong member participation to be effective.
6. Consider these other key factors
Employment and classification considerations
If you plan to hire workers, understand the difference between employees and independent contractors under IRS and Department of Labor standards. Misclassification can lead to costly audits and back taxes. Also, stay up to date on minimum wage and overtime rule changes that vary by state.
Location and operating environment
Where you choose to operate affects taxes, costs, and access to customers. Each state and city sets its own tax rates, zoning rules, and licensing requirements. Some areas offer business incentives, while others have higher expenses or stricter regulations.
Research the total cost of doing business in your chosen area, including taxes, insurance, and utilities, and confirm that it aligns with your resources.
Growth potential
Some business types are easier to expand than others. For instance, franchises and ecommerce models can scale more quickly than localized service businesses. When choosing your type, consider how easily you can expand operations, bring in partners, or introduce new products without restructuring.
Compliance and/or insurance needs
Some business activities need federal or state licenses beyond a simple registration. For instance, construction, childcare, or food service may require higher coverage limits or bonding.
Healthcare, financial services, and transportation also face strict oversight. If you are planning to launch a business in any of these industries, be fully aware of your insurance, liability, and compliance requirements.
Tax obligations
Each business type carries unique tax filing responsibilities. LLCs and sole proprietorships often file pass-through returns, while corporations must file separate business taxes. Some states, such as California and New York, impose annual franchise or business privilege taxes.
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Get access to capital and funding options
Your access to startup capital can determine whether you should start small or partner with others. That’s why it’s always important to evaluate whether you can self-fund or if you qualify for small business loans. If you need a loan to help you get started, some great options from Credibly include:
- Working capital loan: A short-term loan to cover day-to-day operational expenses (payroll, rent, inventory gaps).2
- Merchant cash advance: You receive a lump sum based on your future credit/debit card sales and remit via a percentage of daily card transactions.2
- Business line of credit: Flexible access to funds up to a set limit; you draw as needed and pay interest only on what you use.1
- Equipment financing: A loan or lease specifically for purchasing tools, machinery, or equipment; the equipment often acts as collateral.1
- Long-term loan: A standard term (multi-year) loan that offers larger funding with fixed or variable payments over time.1
Once you’ve identified the funding option that best supports your business goals, the next step is finding a financier who understands your vision and industry.
Disclosures
1. Some products are made available through Credibly’s network of external funding partners.
2. Credibly merchant cash advances and working capital loans to merchants in California are provided by Retail Capital LLC. All other Credibly products in all other jurisdictions are provided by Credibly or Arizona LLC.
