Americans created 2.8 million more online microbusinesses in 2020 than 2019, the World Economic Forum reports. Online mircobusinesses, the smallest of small businesses, are defined as businesses with an active website (like an online store, for example). Around 90% of newly-formed microbusinesses employ less than 10 employees, while just under 20% of the total 20 million microbusinesses in the United States were launched after the beginning of the pandemic.
A perfect storm
The increase in online microbusinesses has likely been influenced by a number of factors, including the growing unemployment rate triggered by the onset of the pandemic. In turn, people became “necessity entrepreneurs” and started looking for other income streams. Additionally, ample financial support was also provided by pandemic relief funding — however 63% of new microbusiness owners report needing as little as $5,000 to successfully launch their business. Around 40% of microbusiness entrepreneurs say their venture is currently a supplemental source of income, while 67% say they want their microbusiness to become a full-time job in the future. Around 25% of microbusiness owners report earning over $4,000 a month.
Wider entrepreneurial trends
This boom in U.S. microbusiness creation matches up with the country’s wider entrepreneurial trends. There were 9.44 million unincorporated, self-employed individuals in the U.S. in October 2021 — the most since the 2008-09 recession. This figure came just one month after a whopping 4.4 million Americans quit their jobs — a record high. New business applications increased at higher rates across industries highly-affected by the pandemic with retail trade applications taking the lead (they increased by 74% by 2021). Additionally, many small business retailers are now going digital: online sales generate vital profits for almost 90% of entrepreneurs, while nearly 100% say digital technology is essential for running their business. Moreover, new business applications in the accommodation and food service sector grew by 55% and by 23% in the health and social assistance industry. The warehousing, professional services, transportation, and construction industries have also recently experienced increased rates of new business applications.
Legal structures: 35% of small businesses are LLCs
Microbusinesses operate just like any other business — meaning they’re taxed depending on their legal structure and the owner must pay required taxes, including state and federal taxes. Limited liability companies (LLCs), in particular, are one of the most popular small business legal setups, accounting for 35% of small businesses, while 33% are S corporations, 19% corporations, 12% sole proprietorships, and 2% partnerships, data from the National Small Business Association reveals. In 2022, most startups will be sole proprietorships, according to Intuits 2021 New Business Insights report.
When it comes to deciding where to form an LLC, a host of different factors (such as, taxes and regulations) impact this decision. California, for example, ranks as one of the best states to form an LLC thanks to its overall advantageous business climate. A California LLC offers two key business benefits: pass-through taxation and legal liability protection. With pass-through taxation, a California LLC can avoid the double taxation corporations are typically required to pay. Instead, business income and losses are taxed on the owner's personal income tax return. And, personal liability protection means the business owner isn’t held personally liable for business debts or business-related lawsuits. Alternatively, Wyoming is another advantageous state for forming an LLC. In particular, Wyoming has no state income taxes for LLCs, along with legal liability protection. Keep in mind, however, Wyoming’s charging protection laws (which protect business assets and ownership from creditors) don’t extend outside of the state. So, if the business owner lives elsewhere, their assets may still be vulnerable to creditors.
Small business ownership by race, gender, and education
Once the pandemic hit, online microbusiness creation increased fastest among groups experiencing greatest economic difficulties. Black owners, in particular, comprise 26% of all new microbusinesses, up from 15% pre-2020, while women-owned businesses now account for 57% of all new microbusiness, up from 48%. Just 5% of Black individuals are self-employed, compared to 9.6% of the overall population, while at least 51% of an estimated 11.6 million small businesses are women-owned. Although the business world is still largely male-domainted, women-owned businesses have grown by an impressive 114% over the past twenty years. Moreover, microbusinesses have also become a popular option for people without a college degree, now up 44% from 36% before 2020 in this demographic. In fact, only 44% of small business owners have at least a bachelor’s degree, while 31% have an associate degree or took some college courses without graduating.
Microbusinesses are indeed booming in the U.S. Although they may be small, microbusinesses are playing a key role in the U.S. economy as more and more people are choosing to embrace the entrepreneurial spirit and launch their own ventures.