As the gig economy has thrived, the way we classify various types of worker has come under scrutiny. Whilst there are growing numbers of people that run their own business, many of these are sole traders with little real prospect for growth in employee numbers. As such, it’s been important for officials to differentiate between those happy to work for themselves, versus startups with real potential to scale.
A recent paper from researchers at Berkeley suggests that a simple way to tell the two apart can be by examining their legal status. The paper argues that if a company is incorporated, there’s a good chance that the company will be one looking to grow and scale, whereas unincorporated business owners are slightly different.
When is an entrepreneur not an entrepreneur?
“When people think of entrepreneurs, they think of somebody creating something novel, something nonroutine, something risky, and cognitively challenging,” the authors say. “We found that people who open such businesses tend to open incorporated businesses. In contrast, when people open businesses that perform fairly routine activities, the founders tend to have less formal education and open unincorporated businesses.”
The rationale is that when we take greater risks, the limited liability status is crucial to limit our exposure. The authors tested their hypothesis by analyzing the financial success of companies of both type.
A number of clear distinctions emerged between the two. For instance, it emerged that prior to starting their company, incorporated entrepreneurs tended to:
- have higher self-confidence
- want to be in control of their own future
- be more prone to break the rules
- operate in highly intellectual fields
- come from wealthier families
What’s more, entrepreneurs in the ‘incorporated’ bucket tended to score higher on learning aptitude tests, whilst also engaging in riskier lifestyle behaviors, such as taking drugs and gambling. Such people were more than twice as likely to launch an incorporated business as their peers.
Unincorporated business owners, by contrast tend to rely more on manual skills, and had previous employment in similar work.
The analysis also revealed that incorporated ventures were also more likely to employ others, and to earn more than their unincorporated peers.
“We found that over time incorporated business owners are more likely to describe themselves as “entrepreneurs” than unincorporated business owners,” the authors say.
Loving what you do
Of course, regardless of the type of company someone works in, a second study suggests that the founder very much loves what they do. The paper, from researchers at the University of Helsinki, used functional MRI scans to monitor the brain activity of fathers and high-growth entrepreneurs.
Whereas fathers were shown images of both their own children and other children they knew, the entrepreneurs were shown pictures of their own companies, and others they were familiar with.
The data revealed that the parts of the brain that are responsible for the theory of mind and social understanding were deactivated in the brain of parents when looking at their own children. Interestingly however, the same was true when entrepreneurs looked at their startup.
What’s more, the brain areas responsible for processing emotions seemed to be connected to the confidence levels of both the fathers and the entrepreneurs.
“Our results indicate that less confident fathers and male entrepreneurs may be more sensitive to the dangers and risks of parenting and entrepreneurship,” the author says.
On the other hand, the results also suggest that overconfidence and the repression of negative emotions may lead to overestimation of the probability of success and overly optimistic assumptions for the company.
Either way, there appears to be a clear correlation between the connection parents feel to their children, and the connection entrepreneurs feel to their startups. Of course, the study didn’t delve into whether this is the same for unincorporated startups as for their incorporated peers, but maybe that’s a study for another day.
