Small businesses are the backbone of the US economy. But what is the definition of a small business? What criteria are used, and who sets them? How many employees can a business have and still be considered small? Find the answers here.
What’s the definition of a small business? The answer depends largely on who you are asking and why you are asking.
In the United States, for instance, when the average person thinks about the term, “small business,” they think of the shops in town, their mechanic, their hairdresser, the local bodega, local restaurants and franchises, small marketing agencies, and web developers or perhaps the small manufacturers in a local industrial park. For the most part, these businesses are very small with just a handful of employees. In fact, the United States Census Bureau reports that the majority of US employer businesses have fewer than five employees. In addition to these very small employer businesses there are the more than 25 million non-employer businesses. Thus, to the average person in the US, small business means very small. Things change, however when the term small business is used by the US Small Business Administration (SBA).
How the Small Business Administration Defines Small Business
The SBA small business definition is based on the industry and the number of employees or annual sales a company has. The SBA uses the term “small business” to apply to not only to one-person businesses and companies with just a few employees, but also to businesses that are much, much larger. In some industries, for example, businesses with as many as 1500 employees are considered small by SBA standards.
Because what is considered small varies by industry, the SBA publishes a table of small business size standards. The table, which is organized by NAICS code, indicates the largest size a business and its affiliates can be to remain eligible for government programs and preferences reserved for “small business” concerns.
When Do Small Business Size Standards Matter?
These size standards come into play for programs such as government contracting, the SBIR and STTR programs, 8a, program, and federal financial assistance programs. The goal of such size standards is to help small businesses gain access to resources and compete against industry giants. The size standards vary by industry according to NAICS classifications and are generally based on the number of people employed or the annual receipts of a business.
How Much Do Size Standard Vary By Industry?
There can be a significant difference from one industry to another in what qualifies as a small business. For instance, under the SBA small business size standards, the maximum number of employees that Fish and Seafood Merchant Wholesalers can have to be considered a small business is 100, while companies that provide Aircraft, Aircraft Engine, and Engine Parts services qualify as small with as many as 1500 employees. In industries where size standard is determined by annual sales, there are similar disparities. Strawberry farmers and potato farmers can be considered small as long as they have no more than $1 million in annual sales, while chicken and egg producers can have up to $16.5 million dollars in sales. Residential Remodelers can have $39.5 million dollars in sales and still be considered small.
Additional Criteria Required to be Designated a Small Business
In addition to meeting SBA size standards, a business must also meet these criteria:
- Be organized for profit
- Have a place of business in the U.S
- Operate primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor
- Be independently owned and operated
- Is not dominant in its field on a national basis
The business may be a sole proprietorship, partnership, corporation, or any other legal form. the definition will vary to reflect industry differences, such as size standards.
Why Small Business Size Standards Are Important
Small businesses really are the backbone of the US economy. The federal government (and state governments, as well), want small businesses to succeed, to help the economy grow. Thus they have developed a wide range of programs designed to help small businesses get loans, financial aid (such as the recent EIDL grant and Payroll Protection Programs, and compete against big businesses for contracts and subcontracts that will help them grow.
How to Determine If Your Business Qualifies
How does a business that wants to compete for government contracts or apply for federal financial assistance know whether their particular business qualifies as a small business?
The answer is easy for those very small businesses with just a few employees that meet the other criteria listed above. But what about larger small businesses? How do you know if your larger small business qualifies as “small” under the SBA rules?
The exact criteria are listed by NAICS code in the Code of Federal Regulations (CFR). The CFR also contains explanations of the various rules and regulations related to the size standards. Another way for our business to determine whether it qualifies as a small business is to use the SBA’s Size Standard Tool
Where to Get More Help
The US Small Business Administration and resource partners have offices located throughout the US. Here’s where you can find local assistance and training resources.
