Many people use the phrase ‘independent small business’. But what does it mean? Some may interpret it differently, but understanding its definition is important for founders and customers.
Whether a business is independent or not influences its ownership structure, how decisions are made, and how customers perceive the brand. In many cases, independence is shaped by early decisions made during company formation. However, things can change as previously independent businesses can become part of groups with external control.
In this article, 1st Formations will explain what it means to be an independent small business, running through its definition and differentiation.
What does ‘independent small business’ mean?
An independent small business usually refers to a privately owned, self-governed organisation that is not part of a larger company, franchise, or wider group. This means it operates under its own name and brand identity.
Independence usually means that the owner makes strategic, financial, and branding decisions. While they can hire people to advise them, they’re not accountable to a parent company or controlling investors.
Funding for independent small businesses often comes from personal investment, small business loans, or reinvested profits. This allows founders to grow without giving away decision-making authority. Sometimes, funding will come from external investors but only having minority shareholders allows the original owner to retain control.
To be classified as a small company for accounting purposes in the UK, the business needs to have two of the following:
- A turnover of £15 million or less
- £7.5 million or less on its balance sheet
- 50 employees or less
Technically, an independent small business could be an organisation with a turnover of £14 million and 40 employees, providing it has no connections to other corporations. However, consumers will typically think of a small business as something far smaller. For example, a consumer may consider their local coffee shop as a small business, but they might be less likely to view an e-commerce site turning over millions in the same way, even if they both meet the technical definitions.
How independent small businesses differ from franchises and chains
Many people often confuse independent businesses with franchise locations or small branches of chains. However, they are different when it comes to ownership structures and autonomy.
With a franchise, an individual owns their business but is governed by a parent brand. As a result, they must follow set rules on branding, suppliers, pricing, and operations. Those who become a franchisee of a pizza takeaway must adhere to the parent company’s menu and policies.
As for chains, these are owned and controlled centrally. While different branches will likely have local managers, they won’t usually have decision-making power.
While it can be tough for independent businesses to compete with the price points of chains and the familiar branding of franchises, they do benefit from the freedom to choose suppliers, pricing, and marketing approaches. Because of this, small independent businesses can often adapt more quickly to local customer needs, without the time-consuming approval processes often found in larger organisations.
Common characteristics of independent small businesses
While every company is different, independent small businesses tend to share some characteristics.
Typically, independent small businesses feature owner involvement in daily operations. Founders tend to be more hands-on and aware of what’s going on. Often, the business will also have an identity that is tied to its founder’s values or expertise. This can add a personal touch that larger organisations may not have. Typically, smaller independent businesses have closer relationships with customers and local communities than big corporations.
The high level of owner involvement can also mean that decision-making happens quickly. As the owner doesn’t have to answer to a parent company or controlling stakeholders, they can change things when they want to. For example, a shop owner might adjust opening hours if they identify that they’re missing out on evening foot traffic.
Independent small businesses also often share the challenge of having to be resource-conscious. For smaller organisations, time and money tends to be even more precious as they usually receive less external investment. As a result, founders may have to take more things on themselves to lower staffing costs.
Why independence matters for business owners
Independence can be great for businesses as the freedom can lead to so many opportunities. For example, founders can create their own brand and execute their personal visions. However, the increased responsibility can also come with challenges.
Founders must prepare to be more accountable for the consequences of their actions. An unwise decision that causes financial loss could lead to staff redundancies. Having this responsibility can be stressful. Plus, as an independent business, there are fewer safety nets, so it can be harder to recover after a wrong move.
Owners also take on responsibility for administrative tasks, like compliance, finances, and long-term planning. It’s important that would-be independent business owners recognise that they’ll need to take ownership of a business’s behind-the-scenes admin alongside outward creativity. However, as they’re in control, they can choose to use external services to help manage administrative duties and marketing as needed.
How business structure affects independence
A lot of independence comes down to how a business is set up. The structure of a company determines who has control and liability.
An independent small business might be registered as a limited company, or an owner may operate as a sole trader. A limited company tends to provide clearer separation between an owner and their business, but the smallest set-ups don’t necessarily need to have a formal business setup. For example, somebody selling downloadable colouring sheets via an online marketplace might be fine to operate as a sole trader. However, if their business grows and they’re considering employ others, it may be necessary to become a limited company.
A business partnership can also be an independent business. This is when two or more people jointly create a business, with each partner taxed similarly to as if they were sole traders. So, having an independent business doesn’t always mean going it alone. Sometimes, you can share responsibilities.
Is an independent small business right for everyone?
Being an independent small business isn’t the ideal setup for all companies. Some businesses will benefit from being part of a chain or a franchise, instead. When going into business, potential owners need to consider their priorities when deciding if they want to be independent or not. Do they want greater control over decisions? Or would they prefer the structure and support that comes with being part of a larger group?
While independence offers more flexibility and control, it also tends to come with more responsibility and risk. The right business model depends on several factors, including desired speed of growth and amount of control. For example, it may be easier to grow a business more quickly with the overarching branding of a franchise. However, the owner must be prepared to follow existing guidelines, so it’s likely not the right choice for someone who wants to create a brand.
Different things will suit different businesses and the people running them. Company formations and independence are important things for founders to think about before setting up or growing a business. While every business’s path is unique, some founders choose to use external organisations, such as 1st Formations, to help navigate company formation and ongoing compliance considerations.
