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Starting a Micro Business: Everything You Need to Know

What’s bigger than a side hustle but smaller than a small business? Ta-dah! A micro business. These are becoming more and more popular among entrepreneurs and it’s easy to see why. It doesn’t have to be world changing but if you’ve been itching to start a micro business of your own, here's how to do it right.

What is a Micro Business?

So you’re ready to take a side hustle to the next level, but you don’t want to create a full-blown small business yet? Or maybe you’re ready to start a business from scratch but want to keep it really, really small. A micro business is the perfect solution.

Micro businesses are the newest trend among entrepreneurs as they’re super small businesses (think 1-5 people) that require very little capital to start. According to the Small Business Administration (SBA), there are more than 3.8 million microbusinesses in the United States today.

What is the Difference Between a Micro Business and a Small Business?

A micro business typically has about 1-5 employees, while small businesses have ten or fewer. Many micro businesses start as side businesses until the entrepreneur is ready to take it full-time. Micro businesses also require less money to get started and earn less than $250,000 per year, while small businesses can earn millions. Micro businesses can be run by micropreneurs (those who manage and lead a small team) or solopreneurs (those who work alone). Taxes for microbusinesses can vary depending on the type of entity under which the microbusiness is incorporated.

Sole Proprietorship

Micro business owners who don’t want to form a legal entity, like an LLC, can be sole proprietors. Why not keep operations simple, right? Sole proprietors pay tax on business income when they pay their personal taxes. However, suppose a sole proprietor doesn’t have a separate business account. In that case, juggling business and personal taxes can be tricky, and they might miss out on certain tax deductions if not fully aware.

What’s the catch? Doing business as a sole proprietorship leaves owners unprotected in a way that forming a legal entity doesn’t. Entities, like LLCs or S Corps, give owners more protection for personal assets so they aren’t jeopardized during financial hardship or litigation.

Limited Liability Company or LLC

LLC taxes are typically very simple and flexible for micro business owners. There’s a reason why more than 80 percent of small business owners choose an LLC when forming their business. LLCs are “pass-through” entities, meaning profits are “passed through” as income to owners or members, and business owners get to report LLC income on their personal tax returns.

As far as asset protection, LLCs offer a hybrid structure that allows owners more control over their business and extra protection for personal assets in case of financial or legal issues because company assets are owned by the LLC and are separate from the owner’s personal assets.

S Corporation

Filing as an S Corporation could save micro business owners money. Meaning, like an LLC or sole proprietorship, profits pass through to shareholders, and income is taxed on the shareholders’ personal tax returns. This means the corporation’s profits are only taxed once, and shareholders avoid double taxation.

S Corps also offer owners certain legal protections for personal assets, which are separate from the business’s assets. Shareholders aren’t personally liable for the company’s debts or liabilities, and creditors can’t go after the shareholders’ personal assets to recover business debts.

C Corporations

If a micro business is a C Corporation, the company pays C Corp tax rates on qualifying corporate profits. Then, post-tax income can be distributed to corporation shareholders as dividends. Shareholders are taxed on dividends, so owners pay taxes on the same earnings twice—once at the corporate level and then at an individual level. This is called “double taxation.”

Since a C Corp is a separate legal entity, the business’s liabilities are separate from the liabilities of the directors, investors, and shareholders.

Freedom

Being a micro entrepreneur means you control your own schedule. Get a sudden burst of inspiration at midnight for that new design project? Want to take the day off to catch up on household tasks? The only person you report to is yourself.

Unique business

Micro business decisions are left up to the owner and sometimes a small number of employees, meaning you create the unique business of your dreams or serve niche markets that larger organizations can’t.

Low Start-up Costs

Micro businesses are, well, micro. This means that they require little money to get started, and there aren’t hefty expenses for employees, operations, and office space.

Simplicity

With fewer people to manage, running a micro business offers simplicity that small or large companies don’t. Of course, there will still be challenges, but overall operations will be much easier with a micro business.

No Brand Recognition

At first, it may be challenging to attract customers because your business doesn’t have the same brand recognition and credibility as bigger names in the industry.

Self-funding

If you’re planning on funding the microbusiness yourself, saving start-up costs can be difficult and take a long time.

Pricing Limitations

Micro businesses may not be able to set prices that beat larger businesses and may be less equipped to handle seasonal dips in sales or periods of high demand.

Limited Resources

Bringing on new employees or buying new technology can be a challenge for microenterprises because you may not have as many resources as larger businesses out there.

1

Choose a business concept

Think about your hobbies and interests. Can you turn any of those into a money-making micro enterprise? Among the various options available today, you can easily spot something that suits your skillset, personality, and the lifestyle you already have or desire.

2

Name your business

Your business needs a good, unique name. If you already have one, use this business name search to make sure it isn’t already taken. Don’t have any ideas? Don’t worry, our Business Name Generator can help you come up with a great one.

3

Create a business plan

Business plans typically include details about your business model, target markets, marketing plan, business goals, location, financing, operations, and hiring. A business plan will help you market your micro business, obtain funding, make profits, and grow.

4

Choose the right micro business structure

Many micro entrepreneurs operate as sole proprietors to avoid the business fees and paperwork required to form an official business entity. But, by incorporating as an LLC (Incfile can help you do this for $0!) when you’re ready, you’ll have extra protection for your personal assets while still avoiding the complexity and regulations of a corporation.

5

File the correct formation paperwork with your state

Each state has different requirements for the paperwork and costs required to start an LLC. Services like Incfile can help you do this for free. Once you file the formation paperwork, it can take a few weeks to form the business legally. Still, this step is necessary before moving on to the other business formation tasks below.

6

Apply for an Employer Identification Number (EIN)

Once your micro business is legally formed, apply for an EIN with the IRS. An EIN is basically like a Social Security Number for your business and will allow you to open a business bank account, pay employees, and file taxes.

7

Secure financing

Once you have an EIN, open a business bank account, research business credit cards to find the right one for your needs, and look into microloans if you need more capital to get started.

8

Launch

Congrats! You started a business. Now it’s time to get to work.

9

Maintain your micro business

To keep your micro business in good standing, file any annual reports your state requires, pay your quarterly estimated taxes, renew business licenses and permits as necessary, and file annual taxes each year.

Support for micro businesses

Sometimes micro businesses need support that isn’t in the form of financing. There are resources out there that can help you write a business plan, file for incorporation (Incfile can do this for you for free!), do accounting, or get continuing education. Some states have their own support networks for small businesses. For example, the Texas Governor's Office of Small Business Assistance and the Business Permit Office can help small and medium businesses in the state through advocacy, entrepreneurial support, education, and technical assistance. To find support in your area, research your state’s small business assistance programs or use this SBA tool that allows entrepreneurs to search for local free or low-cost resources and in their zip code.

What are examples of a micro business?

Some examples of micro business ideas include freelance writing, editing, art, or design; photography; home improvement services, like plumbing, landscaping, and housekeeping; pet grooming; hairstyling and makeup; making goods to sell on Etsy; food and beverages; car washing; tutoring; coaching; deco

How do I get a loan for my micro business?

Many states have programs that help micro businesses find the right financing. We also recommend speaking with a few banks and credit unions in your area to see which small business financing options they offer. The SBA has a helpful Lender Match website that helps entrepreneurs connect to potential lenders that offer SBA funding.

Do I need insurance for my micro business?

Many entrepreneurs take out business liability insurance to protect themselves and their assets. The most popular type of business insurance is professional liability insurance (also known as errors and omissions insurance). This coverage protects your business from negligence claims, like harm or damage caused by a mistake on your end. We recommend meeting with a business insurance agent. They will provide you with multiple options and guide you toward the right coverages for your specific business.

Can a sole proprietor or solopreneur be a micro business?

Yes! A sole proprietor or solopreneur can run a micro business, but incorporating as an LLC offers extra protection for the business owner’s personal assets.

Do I need an accountant for my micro business?

If owning a business is new to you, an accountant or bookkeeping service may be able to help you navigate state, federal, and self-employment taxes (at least during your first year!).

What is a micro business plan?

A micro business plan is similar to any other business plan. A micro business plan should have an executive summary, your goals for your micro business, a description of your micro business, a market analysis and likely demand, an overview of how your micro business is structured, your online business model, how you will market and sell your offerings, financial projections, and appendices.

What is a micro industry?

Micro industry, micro enterprises, and micro companies are all just other terms for micro businesses.

What is a registered agent?

Whether it's an LLC, S Corp, or C Corp, every formal business entity must have a Registered Agent. A Registered Agent is an individual or business that receives important information, official documents, and correspondence from the state government, federal governments, and other agencies. They forward that information to your micro business so you can respond to it appropriately.