Scott Shane's post Should We Count Non-Employer Businesses? raises a number of interesting questions related to the fact that a growing share of U.S. small businesses don't have employees.
He wonders whether or not these businesses should count as small businesses. He also closes his article by saying:
Patterns like these suggest that we need to understand why fewer and fewer American entrepreneurs are starting businesses with employees.
We've long studied non-employer businesses (we prefer to call them personal businesses). Back in early 2007 we released a research report forecasting the continued growth of personal businesses.
More recently we did a deep dive on independent workers (freelancers, independent consultants, etc.) - most of which qualify as non-employer businesses.
Based on our research we think there are 3 broad types of personal businesses:
1. Job substitutes: These are freelancers and other independent workers who by choice or by necessity don't have traditional jobs but have created a personal business as a job substitute. These folks tend to stay independent and tend to stay personal businesses (few hire traditional employees).
2. Part-Time/Hobby businesses: A lot of personal businesses are very small, part-time endeavors. They're generally driven by a personal passion or the need/desire to create income. While some of these businesses expand into employer businesses (see Today's Hobbyists are Tomorrow's Hobbypreneurs), most don't.
3. True Small Businesses Without Traditional Employees: A rapidly growing segment, these firms use technology, outsourcing, partnering and contingent workers instead of traditional employees. These businesses often expand into employer businesses as they mature.
So to get back to Scott's questions:
1. Should non-employers count? Personal businesses that are job substitutes or part-time/hobby businesses behave very differently than employer small businesses. Because of this, in our corporate consulting work we strongly encourage our clients to treat the job substitute and part-time/hobby personal businesses as very different segments than employer small businesses.
So in that sense, we agree with Scott that they shouldn't count as traditional small businesses.
This doesn't mean these businesses aren't important - they are, both to the owner and the U.S. economy. It just means they behave differently than employer small businesses.
We also advise our clients to treat true small businesses without employees like the employer small business segment. These firms behave much like employer businesses - and they often effectively have employees through their use of contingent workers. So we think this group should be counted with employer small businesses.
2. Why are fewer Americans starting employer businesses? The main reason, we think, is for many types of small businesses it no longer makes sense to have traditional employees, or at least have traditional employees early in a firm's life.
Automation, outsourcing and contingent workers are cheaper and provide much greater business flexibility and agility. Use of these resources also cuts upfront capital requirements and lowers business risk. And not having traditional employees reduces the administrative and regulatory burdens of running a business.
We're seeing more and more industry segments become viable for personal businesses. Technology and the ability to access talent and business infrastructure on an as needed basis is enabling this trend. Good examples of this include the growth of talent marketplaces like eLance and oDesk and the ability to contractually access world class business infrastructure through services like Amazon's AWS.
Because of this, we continue to forecast a growing number of personal businesses.