Most of us have an innate fondness for small businesses for one reason or another. Maybe you like the idea of meeting and chatting with the business owner of a small establishment more than the idea of interacting with automatons in a large, bureaucratic organization. Maybe you like the meritocratic elements of entrepreneurship as a reward system for the industrious. Or maybe you just like seeing lots of unique little shops in your hometown.

But aside from our subjective preferences, it's objectively true that small businesses function as the heart of our economy, on both a micro and macro scale. Why are small businesses so important? And how can you start one of your own?

Why Small Businesses Are So Important for the Economy

These are just some of the reasons why small businesses are so important for our economy:

Innovation and growth. When businesses get large, bureaucratic, and complexly organized, they tend to slow down in terms of innovation and growth. Established companies would rather adhere to the formula they used to become so massive than experiment with something new, while new and small businesses are forced to innovate if they want a chance to compete. Because of this, a disproportionate number of new inventions and industry disruptions come from small businesses and startups. Large corporations also realize this; it's why established businesses like Google often secure their innovative capacity by buying up new small businesses, rather than innovating from within.

Supply and demand agility. Having an economy with a large number of small businesses provides more economic agility than one with a small number of large businesses. If there is a supply or demand problem limiting our economic capacity, a small business owner can easily pivot to try and close the gap, while larger, more sluggish organizations struggle to adapt. For example, if demand for bookkeepers is on the rise and there aren’t enough skilled or educated people to fill the gap, you can start a bookkeeping business of your own and take advantage of the opportunity, or perhaps pivot your existing business to offer bookkeeping services.

Competition. Free markets depend on competition to spur innovation and push prices lower for consumers. Small businesses are healthy for a competitive environment, and for several reasons. New businesses are constantly emerging, providing a more diverse and more reliable stream of new competitors. They also periodically fail, which is important for a healthy economy; large, entrenched businesses, by contrast, are often the target of government bailouts whenever they run into trouble.

Job creation. According to the Kauffman Foundation, businesses less than a year old create more than 3 million new jobs annually. This makes them far more effective at job creation than their older counterparts. Job creation is vital for a healthy economy, since it allows people to work, make money, and spend money on a discretionary basis.

Tax revenue. Regardless of how you feel about the legitimacy of taxes, in our current system, small businesses provide significant tax revenue to local municipalities. In fact, they're one of the most prominent sources of tax revenue, making it possible for local governments to serve their populations effectively.

Potential for long-term expansion. Every small business that launches has the potential to change the world for the better. If they serve their customers well and continue innovating, they could eventually grow to become bigger, more disruptive organizations.

How to Start a Small Business

So how do you start a small business of your own?

Examine your role and your environment. Before you make any formal plans to start a small business of your own, examine your personal role and your current environment. What skills, knowledge, or expertise do you have that could be valuable? Are there any gaps in the market that you can currently fill? How hard is it to start a business in your area?

Start writing a business plan. Writing a business plan is a great first step for any entrepreneur. It's your opportunity to formalize some of your initial plans and validate or invalidate your intuitions with objective research. You'll quickly determine whether your idea is economically feasible, and you'll be able to iron out some of the problems that would otherwise hold you back.

Assess risks and weaknesses. Many inexperienced entrepreneurs make the mistake of disproportionately focusing on the potential upside, optimistically estimating revenue, and imagining best-case scenarios. Instead, it's better to be more risk averse, calculating your risks and evaluating your weaknesses carefully. Every small business will have weaknesses and threats; you can't afford to ignore them.

Start raising money. At this point, you'll be ready to start raising money. You can use some of your own savings, hit up friends and family members, seek investments from angel investors or venture capitalists, or take out a loan. Alternatively, you can crowdfund the business.

Supporting Small Businesses

If you can't start a small business of your own, or if you don't want to, there is something else you can do to support our small business-centric economy: support more small and local businesses. Rather than doing your purchasing with a corporate juggernaut or a 100-year-old bureaucratic institution, spend your dollars with a neighbor who is taking a risk by starting a venture of their own.

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