Cost of Doing Business: Why Small Business Prices are Higher

The COVID-19 pandemic has led to what what has been called “the Great Resignation,” as well as a series of worker strikes. More individuals are turning to the gig economy and/or self-employment to mitigate risk while supporting their families and communities.

These are all good things! But the learning curve required to run a successful business is steep. According to 2018 data from the Small Business Administration, around 1 in 4 new businesses will fail in the first year. And only half of small businesses survive the 5-year mark.

It is not yet clear what impact COVID-19 will have on these statistics.

Why Do Small Businesses Fail?

It takes race, gender, and class privilege to understand the legal, financial, and economic nuances of late capitalism. When talking about money is considered taboo, it only increases the knowledge divide.

It is in the best interests of the wealthy elite for most people to remain ignorant about what it actually takes to run a business. By withholding knowledge and information, CEOs and CFOs can make decisions that are in their best interests, and command incredible amounts of power and influence.

It can be overwhelming to sift through research about the pros and cons of different business structures and regulations. It is expensive to hire a lawyer to do that leg work for you.

Seeking advice through organizations like SCORE might help. But a retired small business owner might not understand the nuances of starting a business in today’s economy. Especially when differences in power and privilege are taken into consideration.

There were many COVID-19 relief packages for small businesses early in the pandemic, but most have dried up. And not all of them were accessible to businesses without proof of significant income in 2019.

What Counts as a Small Business?

The most simple and straightforward type of business is a sole proprietorship. This is a fancy way to say that you ARE your business! In a sole proprietorship, there is one individual who takes full responsibility for the business.

If you have ever accepted money in exchange for goods or services, you might be a sole proprietor without even realizing it. Luckily, the IRS defines the threshold after which which it is necessary to pay taxes on self-employment income.

I have done freelance work off and on for over a decade. But having a client or two on top of a full time job is very different from making a living from self-employment income.

I expanded my small business in 2021. But I still rely on other part-time income sources to make ends meet.

Many successful small business owners are financially supported by spouses, partners, or family inheritance. Often, grants or loans are not accessible to sole proprietors (although COVID-19 has created some flexibility in these requirements).

What Makes Small Business Different?

When you are an employee, your employer takes taxes out of your paycheck. When you are an independent contractor or a small business owner, you have to pay all taxes yourself.

Paying self-employment tax on top of income tax can add up! Setting aside 30% of your income to make estimated tax payments can help ensure there are no surprises on tax day.

Self-employment means you can deduct business expenses. This has pros and cons! Some expenses might represent costs an employer would have normally paid. (Like software, office space, or mileage). But, I have experienced expenses due to regular employment that previous employers would not reimburse. (Like an ergonomic keyboard and mouse). Whether you have more or fewer expenses as an employee vs small business owner depends on a variety of factors.

When you are self-employed, you also have to generate enough income to cover any holiday, sick, or vacation days. This may mean you are only generating income 46 weeks of the year (or less).

Small business owners also have to pay the full cost of healthcare, disability coverage, and retirement savings. Corporations and non-profits can make deals with insurance companies to reduce costs based on the number of employees seeking coverage. After making the switch from an employee to a small business owner, your healthcare costs may double (or even triple), while your actual benefits decrease.

I haven’t even mentioned the costs of marketing, outreach, social media, graphic design, and more! A small business owner either has to be Jack-of-All-Trades or make enough income to hire employees or contractors.

The Bottom Line

The U.S. economy favors large corporations, which can leverage their resources to reduce taxes and expenses in a way a small business cannot match.

We also know corporations cut costs by not paying their workers a living wage or finding ways to not offer adequate benefits packages.

Up to 30% of self-employment income is set aside for taxes. Business expenses could easily absorb another 30-50% of income. A small business owner might make NO actual income, due to the extent of their business expenses. Or, they could even go into debt. A small business will likely see a maximum of 60% profit, and only if there are minimal to no expenses involved in running their business.

Small businesses are HIGH RISK. When you work for a large organization, they absorb some of that risk for you. But as a sole proprietor YOU have to absorb ALL the risk involved in running your business.

It is easy to look at the prices a small business owner charges and think they are far too high. But I hope you can see now how operating a small business has a lot of hidden costs.

When you pay a small business owner, divide the cost of goods or services by 2 or 3 to gain a better idea of how much income that business is likely actually generating from your purchase.

In reality, as little as 10-15% of what you are paying for goods or services might end up as actual income in a small business owner’s pocket. Even then, they still have rent, utilities, groceries, and car insurance payments just like you.

Many small business owners actually end up working far more than 40-hrs a week, especially during the first few years of operating their business.

Small business is attractive due to the increased agency and flexibility. As well as the opportunity to create a business in line with your ethical code.

But there is little point to operating a small business if we cannot pay ourselves a living wage, or afford a healthcare plan or paid sick days.

What You Can Do

Recognize and value the important work small businesses can do!

We are more aware than ever of the unethical practices of large corporations, and the negative impact they have on our environment, economy, and sociopolitical landscape.

Large corporations hide the true costs of what they do by artificially lowering the prices of goods and services.

This is how corporations like Walmart and Amazon originally destroyed local economies across the U.S.

Putting money into a small business often supports marginalized individuals and keeps money circulating in the local economy. Many small business owners represent minority communities, who struggle to access other forms of employment.

Small businesses are also able to be more flexible and ethical, creating more sustainable practices.

Small businesses can help us imagine different futures, where we are not ruled by large corporations and non-profits.

Due to the constraints of global capitalism, any of us may struggle to afford the services small businesses offer.

But committing to supporting small businesses when possible can help strengthen our local economies and take some of the power away from large corporations.

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