You do run a small business. Your self-employment activity is a business. You have to report the income on Schedule C.
The income is not foreign earned income, because you are working in the United States. The fact that you have a client in another country does not make it foreign income. (Your friend's company is a client of your business.) It is U.S. self-employment income, the same as if you were a contractor for a U.S. company.
