According to a study published in the Quarterly Journal of Economics, the legal status is what differentiates entrepreneurs from other business owners. Most entrepreneurs incorporate their businesses, whereas most business owners do not. Compared with their previous salaries, entrepreneurs’ median annual earnings increased by $6,600 when they became entrepreneurs, according to the study findings.
Owning your own business does not make you an entrepreneur
A key difference exists between a self-employed individual and an entrepreneur. Entrepreneurial status, whether a company is incorporated or unincorporated, distinguishes them from other types of business owners.
Understanding the differences between an entrepreneur and a small business owner requires first knowing the terms. As the Oxford English Dictionary describes it, an entrepreneur is “someone who organizes, operates, and takes on considerable financial risk for the benefit of the business.”
A business owner owns a company to profit from its success. Entrepreneurs are more likely to take significant risks, while business owners are concerned about the profitability of their business, but profit is not mentioned in a definition of an entrepreneur.
Personality types and strengths of entrepreneurs
According to the study, entrepreneurs who have incorporated their businesses tend to launch ventures that require high-level cognitive skills, while those who have not included their companies tend to lead firms that require more manual skills. According to the researchers, a business owner or Entrepreneur might establish the following types of businesses.
Entrepreneurs may create digital advertising agencies or mobile app startups, for instance. On the other hand, unincorporated business owners may be a plumber, contractors, or cleaning people who founded their own company.
As far as analytical reasoning, creativity, and complex interpersonal interactions are associated with entrepreneurship, rather than with eye-hand-foot coordination, the study’s authors state that, on average, the incorporated self-employed engage in entrepreneurial activities while the unincorporated do not. The study’s lead author, Ross Levine, a professor at the University of California at Berkeley, said people often think of entrepreneurs as individuals who create something new, unconventional, and risky.
The differences between corporations and unincorporated companies
A study found that business owners with an incorporated status have added legal protections, which often gives them a little more flexibility to take on higher risks than those without one. It seems that business owners view their legal status distinction to reflect how they see themselves anyway. Unincorporated business owners were less likely to describe themselves as entrepreneurs over time than incorporated business owners.
Advantages of incorporation
Businesses that are incorporated can legally separate their finances from the business. If a liability issue arises, only the business’s assets are at risk. With unincorporated companies, there is no distinction between personal and company assets.
Incorporation allows for greater financial flexibility and the ability to split profits between shareholders and withdraw funds whenever and however desired. Investors and customers alike view incorporated businesses as more professional and stable. This can be a massive advantage for a small business looking to raise capital.
There are additional costs associated with incorporation. There are fees associated with incorporation. A lawyer is often hired to help with legal paperwork and ensure a smooth process, adding expense to the process. Due to incorporated businesses’ more stringent requirements, maintaining proper financial and management records takes more time. An attorney and accountant may be necessary to comply with federal and state regulations and tax laws.
Business owners vs. entrepreneurs
Following a review of Data from the Current Population Survey dating back between 1995 and 2012 and the National Longitudinal Survey of Youth, which surveyed more than 12,000 people annually between 1979 and 1994, the researchers discovered several differences between incorporated and unincorporated business owners.
According to the study, incorporated entrepreneurs:
- Had a higher sense of self-worth.
- Had a stronger sense of personal responsibility.
- Had jobs that primarily depended on intellect.
- More likely to have come from well-educated, high-earning families than salaried workers.
Additionally, entrepreneurs made high scores on aptitude tests before launching their ventures and engaged in illegal and risky activities such as cutting classes, vandalism, shoplifting, assault, and the use of alcohol and marijuana. According to the study’s authors, a particular blend of traits determines whether people will become entrepreneurs and whether they will succeed as entrepreneurs. In my experience, the high-ability person tends to ‘break the rules in their youth that is most likely to succeed as an entrepreneur.”
Those with unincorporated businesses are more likely to be involved in tasks requiring more skill and have previously worked in similar positions. Additionally, the researchers found that incorporated entrepreneurs tend to have more employees, whereas unincorporated business owners have fewer or no employees.
Furthermore, there are differences in the financial earnings of each group of business owners. A study showed that incorporated business owners had a median annual earnings increase of $6,600 when they became entrepreneurs compared to their previous salaries. The average increase for unincorporated business owners was $716 per year.