Redefining “Small Business” in the Gig Economy
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More often than not, traditional business terms do not seem to keep up with changes in society. This is the case with the term “Small Business” which encompasses much larger companies than your typical gig economy sole-proprietorship. Most government incentives as well as bank loans and capital-raising opportunities are often only available to the larger “small businesses.” Gig economy businesses just cannot compete for those resources, and find themselves at a significant disadvantage.
What is a “Small Business”?
In the United States, the Small Business Administration (SBA) is the government agency that is mandated to provide support to small businesses. Unfortunately, this usually includes businesses that have:
Up to 500 employees
Up to $7.5 million in annual receipts
There is some variance in what qualifies as a small business, but let’s be honest, a business with 499 employees and/or $7.49M in revenue per year is hardly “small.” This would be the envy of most gig economy sole-proprietors.
Convention dictates typical minimums for small businesses. For example, a small business is expected to have startup cash, often well in excess of its operating expenses for the first year. Of course that would be wonderful, but the reality is that few gig economy businesses have those resources to start with.
Convention also presumes that small businesses are old-fashioned service-oriented or will require brick-and-mortar locations. This is typical when applying for a loan, where the list of questions from the bank includes requirements that are simply not there for many gig economy businesses.
As an example, the idea that the entire business could be run from a coffee shop on a laptop is dismissed outright. This is a huge oversight. I personally know a web developer who earns over $8K a month working from a laptop while traveling. Granted, this isn’t a million-dollar business, but this proves the point that all the old definitions of what is considered a “small business” do not apply here. Yes, the proverbial laptop-at-the-beach work-life balance is possible, but not in the mindset of banks and the government.
Because gig economy businesses do not fit neatly in the small-business designation, they also do not qualify for the many perks available to small businesses. Everything from Covid-19 relief available under the CARES Act to tax incentives for employees to bank loans are first distributed to larger small businesses with little left to the gig economy small businesses.
So what can be done about this?
I do not believe that the small business designation should apply to the gig economy, to side-gig work, to stay-at-home parents who need extra income, to part-time-work students, or even entrepreneurs. None of those demographics fit the government’s definition of small business. Lumping them under that designation will continue to relegate them to the forgotten step-children of small businesses, better to be ignored or forgotten.
Instead, I propose a new category for gig economy businesses uniquely designed to meet the needs of this new emerging segment of the U.S. economy. Of course, it would have more modest but also more realistic limits to define it. Instead of less than 500 employees, it would have:
Just one employee: the owner. This could include the owner’s immediate family.
Up to $500,000 in annual revenues
In addition to these two requirements I would also include the following:
The business must be less than 5 years old
The reason for that last requirement is that this category is really intended for startups. As any business owner will confirm, the single most difficult part of starting a business for a sole-proprietorship is moving from the idea phase (the initial business plan) to the implementation phase (the first sale of a viable product).
This category represents a segment of the American workforce that needs the most help to compete against established “small businesses,” not to mention larger companies and corporations. As such, the hope would be that both private and public resources would be made available to this category of businesses that would help them get started and complete in the market place, an on-ramp of sorts, to the small-business category.
We could call it the Gig Business category, for example. The government could then create a separate Gig Business Administration (GBA) to meet their needs. Lobbying groups could be formed to represent Gig-Businesses in government. The IRS could create a sperate designation that would provide more allowances in those critical first five years.
Why should anyone care about gig businesses?
At first glance there is little incentive for any other segment of the economy or any government entity to create a separate category for gig businesses. Given the state of the economy as a result of the global pandemic, that would be a shortsighted view.
The current environment creates a glass ceiling for the gig businesses and contributes to high numbers of business failures that are often quoted about small businesses. The reality is that it stifles the growth of the gig economy and stifling growth now will only exacerbate our economic downturn. We need to look beyond the current recession and think about where we want to be next year and the year after.
Recovering from the pandemic economy will require all parts of the workforce to return to work, and that includes the millions of workers who have been furloughed or fired outright. When this is all over, many of their pre-pandemic jobs will have vanished entirely as the economy contracts and some industries shrink or disappear outright. For these people, starting a gig business is the best way forward.
Conclusion
In the end, designating gig businesses to the umbrella category of small businesses does them a tremendous disservice. Their needs are too different and society as a whole needs to embrace the gig economy as a vital part of the recovery. Leaving them in obscurity in the shadow of the entire small business umbrella will only lengthen the economic recession, perhaps irreparably so.
Now more than ever, it is time to give Gig Business a place of its own in economic discussions and to stop ignoring it as a troubled stepchild of small business – if not, we perpetuate a grave misunderstanding about the entire economy and how to repair it.
