Why does SFD USA focus on small firms with 1-20 workers?

By Meghan Greene and Tracy Cole

In our previous blog, we explained that the most common definition of a “small business” in the United States, especially at the national level, is those with less than 500 workers. Despite this, Small Firm Diaries USA focuses on businesses that we call “small firms” that have between 1 and 20 paid workers. So, why did we choose this? And why does this group warrant special attention?

We know that the leap from zero to one paid worker is a big one. But there’s another milestone that’s just as important, and far less studied: the leap from owner-operated to manager-led. 

For small firms in low-income communities, that transition can be especially hard. Research has consistently shown us that these businesses often operate with extremely thin margins, and limited access to credit, networks, and advisory support. Yet, they are also the firms with the most potential for having a positive impact on poverty reduction in these communities; when they grow large and profitable enough to pay better wages to their workers, create stable jobs, and build wealth for their owners, they contribute to helping owners - and their workers - achieve the “American Dream”.

That’s why our research focuses on firms that have already hired their first paid worker and are now reaching a size where the need to hire a manager becomes more pressing. We want to understand what helps or hinders small firms in low-income areas to become larger, manager-led, higher-profit businesses. Because supporting those that make it across this juncture could be an effective way to strengthen local economies, expand opportunity, and reduce poverty where it’s needed most.

Small firms are the largest group of employers in the U.S., particularly for low-income workers

To further demonstrate this point, it's useful to look at the numbers on small firm employment. Of the approximately 36 million businesses in the United States,* 99% of them are “small businesses”.** These small businesses employ 59 million people, or 46% of all private-sector employees, and are responsible for 61% of overall job growth since 1995. More specifically, in 2024, 34% of all private sector W2 employees (part-time or full-time) worked in firms with 1-99 employees, and another 17% were employed in firms with 100-499 workers. The remaining 49% worked in firms with 500 or more employees.***  

Importantly, smaller firms are also more likely to employ low-income workers. A Gallup study based on 2019 surveys found that workers in the bottom 20% of the income distribution are overwhelmingly concentrated in very small firms: 47% work in businesses with fewer than 20 employees, compared with just 8% who work in firms with 500 or more employees. As income rises, this pattern reverses. Among workers in the top 10% of the income distribution, nearly half (46%) are employed in firms with 500 or more employees, while only 20% work in firms with fewer than 20 employees. Middle-income workers fall between these extremes, gradually shifting from small firms toward larger ones as income increases (Figure 1).

Figure 1: Percentage of workers, by income level and size of company

These firms also skew heavily toward the smallest size classes: 63% of employer firms have fewer than 5 workers, and 89% have fewer than 20. Only a tiny fraction of employer firms – 0.3%, or roughly 17,000 businesses – have large workforces, according to Census data (Figure 2). 

Figure 2: Sizes of employer firms in the U.S.

These small firms encounter challenges distinct from other groups

Solo operators can be nimble and flexible, operating without many formal processes or even formal legal status. Larger employers, conversely, are likely to have established operations, processes, and systems that help guide decision making.

But a business with just a handful of employees is likely to be experiencing a unique set of challenges. Owners have a whole set of considerations that sole proprietors may not encounter – from management and delegation, to payroll and tax. With workers on staff, there’s a need for more defined processes and systems. There’s greater opportunity for scale, but also greater operational complexity. Without established processes to draw upon, owners may be building systems piecemeal, erratically, or not at all. These choices can have significant repercussions for profitability and growth. By focusing on this group, we can better understand what’s holding them back from growth that could create more jobs and spur economic development.

Understanding what success really means

As we learn more about the firms in our study – the ones that cross the chasm to having paid workers, and eventually to hiring their first professional manager, we also want to bring more nuanced clarity to the way small firm success is understood. For some, growth will be the right path: expanding operations, hiring managers, and creating more stable, higher-paying jobs. But for others, the best outcome may look different.

In many low-income neighborhoods, there may simply be too many small, low-margin firms competing for too little demand. For some owners and workers, the most meaningful step toward financial security may come not from growing their own business, but from transitioning into employment at larger firms that offer steady income, benefits, and room to advance.

Our goal isn’t to celebrate small business for its own sake. We want to recalibrate the way we think about small firms and our understanding of the best options for reducing poverty - whether through small firm ownership or stable, high wage work. 

*Author’s calculations using data from Census SUSB & NESD 2022.

**Using the Small Business Administration’s definition of firms with less than 500 employees

***BLS firm-size employment figures are derived from the Quarterly Census of Employment and Wages (QCEW), which counts only workers who receive W-2 wages reported under state unemployment insurance systems. As a result, these data exclude independent contractors and other 1099 workers, as well as business owners who do not pay themselves as W-2 employees. Firms that rely heavily on contract labor therefore appear smaller or do not appear at all in the BLS data.