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Entrepreneur or Small Business Owner: Which One Are You?

Entrepreneur or Small Business Owner: Which One Are You?
Credit: Mavo/Shutterstock

Just because you run your own business doesn't mean you are an entrepreneur, new research suggests.

A study set to be published in an upcoming issue of the Quarterly Journal of Economics revealed a key difference of being self-employed and an entrepreneur. The researchers found that a business's legal status – whether it is incorporated or unincorporated – is what separates entrepreneurs from other business owners.

The study found that incorporated business owners tend to launch ventures that are entrepreneurial and require high-level cognitive skills, while unincorporated business owners typically lead companies that demand more manual talents.

The researchers said an example of an entrepreneur or incorporated business owner might be the founder of a digital advertising agency or a mobile app startup. On the flip side, an unincorporated business owner might be a plumber, contractor or cleaning person. [See Related Story: Entrepreneurship Defined: What It Means to Be an Entrepreneur]

"To the extent that one associates entrepreneurship with analytical reasoning, creativity, and complex interpersonal communications rather than with eye, hand, and foot coordination, the data suggest that on average the incorporated self-employed engage in entrepreneurial activities while the unincorporated do not," the study's authors wrote.

Ross Levine, one of the study's authors and a professor at the University of California at Berkeley, said people often think of entrepreneurs as someone who creates something novel, non-routine, risky and cognitively challenging.

"We found that people who open such businesses tend to open incorporated businesses," Levine said in a statement. "In contrast, when people open businesses that perform fairly routine activities, the founders tend to have less formal education and open unincorporated businesses."

The study found that having an incorporated status provides business owners with some added legal protections, which often provides them a little more freedom to delve into larger and riskier investments than their unincorporated counterparts.

The legal status distinction appears to reflect how many business owners already think of themselves.  

"We found that over time incorporated business owners are more likely to describe themselves as 'entrepreneurs' than unincorporated business owners," Levine said.

The researchers found several differences between incorporated and unincorporated business owners after reviewing data from the results of the Current Population Survey from between 1995 and 2012 and the National Longitudinal Survey of Youth, which surveyed more than 12,000 people annually between 1979 and 1994 and biennially since then.

The research found that before starting their own company, incorporated entrepreneurs:

  1. Exhibited greater self-esteem
  2. Wanted to be more in charge of their own futures
  3. Were usually involved in jobs that primarily rely on intellect
  4. Were more likely than salaried workers to come from high-earning families with two well-educated parents

In addition, before launching their own ventures, entrepreneurs scored high on learning aptitude tests and engaged in more illicit, risky activities such as cutting classes, vandalism, shoplifting, gambling, assault, and using alcohol and marijuana.

"It is a particular mixture of traits that seems to matter for both becoming an entrepreneur and succeeding as an entrepreneur," the study's authors wrote. "It is the high-ability person who tends to 'break the rules' as a youth who is especially likely to become a successful entrepreneur."

On the other side of the equation, unincorporated business owners tend to

have responsibilities that require more manual skills and were previously employed in similar work.

In addition, the researchers discovered that incorporated entrepreneurs are more likely to have many employees while unincorporated business owners have few or no employees.

There is also a difference in how financially successful each group of business owners is. The study shows that incorporated business owners reported an increase of $6,600 in median annual earnings relative to their previous salaries when they became entrepreneurs. Unincorporated business owners had median annual earnings increases of just $716.

The study was co-authored by Yona Rubinstein, a professor at the London School of Economics and Political Science.

Chad Brooks

Chad Brooks is a Chicago-based writer and editor with nearly 20 years in media. A 1998 journalism graduate of Indiana University, Chad began his career with Business News Daily in 2011 as a freelance writer. In 2014, he joined the staff full time as a senior writer. Before Business News Daily, Chad spent nearly a decade as a staff reporter for the Daily Herald in suburban Chicago, covering a wide array of topics including local and state government, crime, the legal system and education. Chad has also worked on the other side of the media industry, promoting small businesses throughout the United States for two years in a public relations role. His first book, How to Start a Home-Based App Development Business, was published in 2014. He lives with his wife and daughter in the Chicago suburbs.

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