Just because you run your own business doesn’t mean you’re an entrepreneur.
A study published in the Quarterly Journal of Economics (QJE) revealed a key difference between owning a business and being an entrepreneur. The researchers found that a business’s legal status – whether it is incorporated or unincorporated – is what often separates entrepreneurs from other business owners.
To understand the differences between entrepreneurs and small business owners, it’s important to first know what the terms themselves mean. Generally, entrepreneurs may be more willing to take big risks, whereas business owners may be focused on the consistent profitability of their business. But the differences are more nuanced than that.
Based on the Quarterly Journal of Economics‘ (QJE) findings, which took nearly 40 years of data into consideration, entrepreneurs tend to run incorporated businesses involving articles of incorporation, while small business owners have unincorporated businesses. Incorporated businesses are those in which the entity is legally separate from the owner. An unincorporated business is considered the owner’s legal responsibility and part of their personal liabilities.
According to the Oxford Dictionary, an entrepreneur is “a person who organizes and operates a business or businesses, taking on greater than normal financial risks to do so.”
An entrepreneur can focus more on independence and innovation than a small business owner. You’ll typically find them starting new businesses based on ideas that are a little outside the box. [Read related article: Entrepreneurship Defined: What It Means to Be an Entrepreneur]
This means that many entrepreneurs are just starting out with a business. That, in turn, means they often don’t have access to the resources that more established companies would. They may thus be more reliant on business loans or other external funding. Alternatively, that same lack of resources can also make them more likely to take significant risks to find success.
Business loans can help entrepreneurs finance the risks they’re taking, and with careful planning, this influx of funding can lead to greater success. Check out our overview of the best business loans to find the right loan for you.
The Oxford Dictionary defines a business owner “an individual or entity who owns a business entity in an attempt to profit from the successful operation of the company.”
Business owners are generally more established within their industry and have more knowledge of what actions lead to success. While they can start their own businesses, they’re just as likely to step into a leadership role within an already established company.
Business owners’ experience, along with the stability of their positions, can make them less likely to take risks with their companies. Business owners often prefer to take tried-and-true actions to maintain steady profits for an organization rather than chase a potential boost in revenue.
The QJE 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 cited examples of the types of businesses an entrepreneur or incorporated business owner might establish. For instance, an entrepreneur might found a digital marketing firm or a mobile app business. On the flip side, an unincorporated business owner might be a plumber or have their own contracting business.
“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,” wrote the study’s authors.
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, nonroutine, 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 noted that an incorporated status provides entrepreneurs with some added legal protections, which often gives them a little more freedom to delve into larger and riskier investments compared to 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 investigation also uncovered several differences between incorporated entrepreneurs and unincorporated business owners. Namely, it was discovered that before starting their own company, incorporated entrepreneurs did the following:
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, alcohol and marijuana use, and even assault.
“It is a particular mixture of traits that seems to matter for both becoming an entrepreneur and succeeding as an entrepreneur,” Levine and co-author Yona Rubinstein said in the published study. “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 found that incorporated entrepreneurs more often have many employees, while unincorporated business owners usually have few or no employees.
There is also a difference in financial earnings relative to each group of business owners. The study reported that incorporated business owners gained $6,600 in median annual earnings when they became entrepreneurs. Unincorporated business owners had median annual earnings increases of only $716. [Find out more about business owner salaries and paying yourself as an entrepreneur.]
Entrepreneurship typically attracts people who take greater risks in search of possibly greater rewards. Unincorporated business owners, on the other hand, often prefer more stable work and profits.
Calling yourself self-employed doesn’t adequately describe all business owners, and knowing what to call yourself as someone involved in business is more critical to success than many would believe. “Entrepreneur” and “small business owner” aren’t just different titles – they’re associated with different mindsets and behaviors, as well as different legal statuses. The traits you possess and the legal structure of your business will ultimately define you and your enterprise.
Isaiah Atkins contributed to the writing and reporting in this article.