United States

Small Business

Administration

Office of Advocacy

No. 194

March 2000

SMALL BUSINESS

RESEARCH

SUMMARY

Homebased Business:

the Hidden Economy

by Joanne H. Pratt

1999. 133 pages. Completed by Joanne H. Pratt Associates,

3520 Routh Street, Dallas, TX 75219,

under contract no. SBAHQ-97-M-0862.

This Small Business Research Summary (ISSN 1076-8904) summarizes one of a series of research papers prepared under contracts

issued by the U.S. Small Business Administration’s Office of Advocacy. The opinions and recommendations of the authors of this study do

not necessarily reflect official policies of the SBA or any agency of the U.S. government. For more information, write to the Office of

Advocacy at 409 Third Street S.W., Washington, DC 20416, or visit the office’s Internet site at www.sba.gov/advo.

Purpose

Prior to this study, there had been very little in-depth

information on the characteristics and economic contributions of firms operated from the home. For

example, basic information on home-based businesses (HBBs) — such as the major types of business

activities conducted in the home; the amount of

funds typically needed for a business startup; the

ability of home-based firms to survive, grow, and

find capital; and the net profits of these firms — has

been entirely lacking or based on small samples or

anecdotal evidence.

Using detailed data collected by the Bureau of the

Census in 1996 and 1997 concerning business activity in 1992, this report for the first time gives a detailrich portrait of the home-based sector of the U.S.

economy.

Scope and Methodology

This report is based upon an anlysis of previously

unpublished data collected by the Census Bureau

that breaks out information for both firms operated

from home and firms operated from outside the

home. 

The original data were collected as part of the

census of business that is conducted every five years

(for business activity in years ending with a 2 or 7).

The data cover business activity during 1992. A sampling of 125,000 businesses from the universe of

businesses that filed business tax returns in that year

as sole proprietorships, partnerships, or subchapter S

corporations was used by the Census Bureau to create the Characteristics of Business Owners (CBO)

survey. This effort was underwritten in part by the

U.S. Small Business Administration and the U.S.

Department of Commerce’s Minority Business

Development Agency.

The CBO sample includes the smallest “active

businesses” (defined as those with at least $500 in

receipts) and both employer and non-employer firms.

Those firms surveyed included two gender and three

racial and ethnic categories. In the sample, 33 percent of all firms are owned by women, 59 percent by

non-minority males, 3 percent by Blacks, 4 percent

by Hispanics, and 4 percent by “other minorities.”

(The “other minority” category is about 93 percent

Asian and Pacific Islander and 3 percent American

Indian and Alaska Native.) 

Highlights

Highlights of the report’s findings include:

• Increasingly, people use their home to earn a primary income, not only a secondary or supplementary

income. This varies by industry, demographic group,

and location.

• Home-based businesses represent 52 percent of

all firms and provide 10 percent of the total receipts

of the economy, about $314 billion in 1992.

• The share of receipts accounted for by homebased firms varied greatly by demographic group.
For example, it was 26 percent for all Black-owned

firms, but only 8 percent for home-based firms

owned by Asians.

• Over 55,000 HBBs had sales of more than $1

million in 1992. These same firms employed over

3.5 million persons both at home and off-site.

• About 19 percent of home based firms had

employees. This compares with 18 percent of nonhome-based firms.

• The average receipts of all home-based firms

was in the $40,000 range, with some variance by

demographic group. However, beginning at $50,000,

an increasingly greater percentage of firms are likely

to be non–home-based.

• Of the three general business uses of the home

— for clerical work, for production work, and for

telecommuting — the most money by far is made by

firms that use the home for clerical work. Firms

owned by men were more likely to use the home for

clerical tasks; firms owned by women were more

likely to use the home to produce goods or services

on the premises.

• Forty to 44 percent of all HBBs required less

than $5,000 for startup. Another 25 percent or so

needed $5,000 to $25,000. By contrast, a quarter of

non–home-based firms needed more than $25,000 to

start.

• One third of all home-based firms use personal

assets to start, and 46 percent used personal savings.

Because home-based firms tend to remain in the

home — less than 5 percent eventually move out of

the home — there is some evidence that capital constraints prevent more firms from expanding.

• Some industries — such as construction and

transportation, communications, and utilities —

show about the same profit whether operated in the

home or outside of the home. In these cases, the

home is generally used for clerical work.

• Disabled veterans operate 2 percent of home

based firms, the same percentage as non–home-based

firms.

• Owners of HBBs work on average 26 to 35

hours per week in their firms; by contrast, owners of

non-HBBs work 35 to 43 hours per week, on average. 

• Regardless of business location, 60 percent of

very small firms sell primarily to individuals.

Roughly 10 percent of customers are local, state, and

federal government agencies. Slightly more Blackowned firms sell to the government than the other

demographic groups surveyed. Firms owned by nonminority males showed the highest business-to-business sales, at 43 percent.

• Among the ethnic and racial groups broken out

in the study, Blacks had the highest proportion of

female business owners; relatively few Hispanic

women own businesses.

• Over half of all HBBs survive five years; firms

which close do so primarily from lack of cash or

access to a business loan. Between 1992 and 1996,

about 85 percent of firms with paid employees survived, compared with 51 percent of those who had

no paid employees.

• Home-based firms need help in removing business barriers to grow and succeed. Two areas in

which they need assistance to enter the electronic

world are (1) obtaining and paying for the credit card

merchant status they need for electronic sales and (2)

help in developing an Internet strategy. As Internet

commerce becomes more sophisticated, HBBs may

need capital to develop and maintain profitable Web

sites.

• Laws drafted to restrict commerce in the home

are outdated in this electronic era and need updating.

In addition, restrictive tax rules which prohibit the

deduction of legitimate expenses have a negative

impact on home-based activity.

• The use of technology allows HBBs to work in

teams without the need for daily face-to-face interaction. This allows a firm to expand beyond the physical confines of a residence, while expanding sales.

Conclusions

In the past, a home-based business was viewed as a

side business operated primarily as a hobby or as a

source of secondary income. The data contained in

this study show that assertion to be inaccurate.

The researcher’s findings demonstrate how the

home has become a hub of business activity, entrepreneurship, and business creation. Sole proprietorships, partnerships, and S corporations added $2.9

trillion to the economy in 1992, with home-based

firms contributing $314 billion, or 11 percent. When

regular C corporations are included, the home-based

contribution to the U.S. economy is 5 percent of the

estimated $6.4 trillion total contribution of all small

employer firms with less than 500 employees.

If anecdotal evidence is correct, the home-based

business sector is growing in importance, driven by

the revolution in information technology. It also

offers opportunities for entrepreneurs and at-home
professionals in every demographic and ethnic

group.

There continue to be problems faced by small,

home-based businesses. These problems include:

access to credit for those owners wishing to expand;

difficulties on how to establish a presence on the

Internet; the burdens of local zoning and use restrictions in residential neighborhoods; and the challenge

of how to expand their customer base without leaving the home for a commercial location.

Running and owning a home-based firm offers

new business owners a very inexpensive entry point

into the world of business ownership. This report

demonstrates that this activity is much more significant than previously thought. Clearly, the home

became a hotbed of entrepreneurship during the

1990s, combining income, lifestyle choices, and significant profits and revenues.

Ordering Information

The full text of this report, along with summaries of

other studies performed under contract to the U.S.

Small Business Administration’s Office of Advocacy,

is available on the Internet at www.sba.gov/advo/

research.

Printed copies are available for purchase from:

National Technical Information Service

5285 Port Royal Road 

Springfield, VA 22161

Tel. (800) 553-6847

TDD: (703) 487-4639

Order number: pending

The National Technical Information Service’s complete data base of federally funded business research

is available on the Internet at www.ntis.gov.