Six efficiencies of (small) scale companies

Written by Ricky Nave in Business tactics, strategy, and management

Big companies have the money to build big efficient factories, but not every company is a factory.  Sometimes, there is an advantage in being small.  Here are six advantages of (small) scale.

1.  Exemption from providing parental leave

The Family and Medical Leave Act (FMLA) mandates that companies with 50 employees or more provide 12 weeks of unpaid leave annually to mothers with a newborn child or who have just adopted a child.  The law also covers partners of those mothers (e.g. fathers and step-fathers) and has been extended to caregivers of sick family members.

In the case of a natural birth, the company will have months of notice so the interruption can be relatively smooth.  In the case of an adoption, a parent may be on a waitlist for months or years before suddenly having an opportunity with only days of notice.  A family member can become sick even faster.  Those latter scenarios are tough for an employer if the employee is leading a critical project.  That’s a risk large companies are legally obligated to take, but small companies are not.  (I’m not endorsing, just reporting).

Side note:  Technically the law only applies to employees who work at a location where the employer has at least 50 employees within 75 miles.  That means companies with remote workforces can potentially be exempt from the FMLA even with hundreds or thousands of employees.

Side note 2:  Some states such as California, New Jersey, and Rhode Island require that companies provide paid parental leave even if the employer has fewer than 50 employees.  Some other states also impose different rules, so you’d have to check a specific state to see what small businesses located there are allowed to do.

2. Illegal Labor

Many small businesses illegally hire undocumented immigrants.  These businesses can hire workers for half of the legal minimum wage.  Additionally, these businesses don’t pay the overhead taxes, workers’ compensation, etc that are required for legal employees.  This is one of the reasons private equity firms have failed to consolidate industries such as landscaping and pressure washing.  The 15% productivity increase achievable by the PE fund manager can’t overcome the 50% cheaper labor costs of the small business operator using illegal labor.

David & Goliath private equity meme

3.  Workers’ comp insurance exemption

Many states don’t require employers to carry workers’ compensation insurance unless the employer has some minimum number of employees.  For example, a business in Florida generally isn’t required to buy workers’ comp insurance unless the business has at least 4 employees.  Some types of businesses such as agriculture have even higher thresholds (e.g. 6 full time employees or 12 or more seasonal employees).  On the other hand, construction businesses generally have more stringent requirements.

4.  Simpler, cheaper fundraising

If you want to raise money for your company by selling stock, then you’ll have to comply with both state and federal securities laws.  To raise a lot of money on public markets, you have to pay expensive accountants and lawyers to navigate the public offering process.  At minimum that will cost hundreds of thousands of dollars and more likely it will cost millions.  However, if you have a small startup, you can raise money under certain legal exemptions which greatly reduce both the cost and complexity of staying compliant.

5. Fewer tool dependencies

A company with 20,000 employees would take months to transition to a new CRM software.  Everyone in the sales department of the company has existing contacts, notes, expertise, and business processes that depend on the existing tool.  Migrating to a new tool without interruption requires redesigning existing business procedures for how to run sales calls.  On the other hand, a company with only 2 employees can probably migrate to a new CRM software within a day or two.  The small company doesn’t have as complex of processes which means it has less dependency on the tools it uses.  That means if a new, better tool is developed, the small company can change quickly and cheaply while the large company cannot.

6. Less taxes

Many states impose corporate taxes of some form or another (income tax, gross receipts tax, in-state assets tax, etc).  For example, Delaware has a “franchise tax”.  The franchise tax can be computed in one of two different ways, but in the end you are either penalized by the number of shares your company has authorized or the amount of assets your company owns.  Either way, small companies come out ahead in terms of minimizing Delaware franchise taxes.

Side note:  A big company with only a few owners can actually minimize Delaware franchise tax as well by choosing to authorize a maximum of 5000 shares. 

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Ricky Nave

In college, Ricky studied physics & math, won a prestigious research competition hosted by Oak Ridge National Laboratory, started several small businesses including an energy chewing gum business and a computer repair business, and graduated with a thesis in algebraic topology. After graduating, Ricky attended grad school at Duke University in the mathematics PhD program where he worked on quantum algorithms & non-Euclidean geometry models for flexible proteins. He also worked in cybersecurity at Los Alamos during this time before eventually dropping out of grad school to join a startup working on formal semantic modeling for legal documents. Finally, he left that startup to start his own in the finance & crypto space. Now, he helps entrepreneurs pay less capital gains tax.

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