Whether or not your business qualifies as “small” depends on a few factors. In general, it means a limited staff and an income that is modest in comparison with larger corporations.
In the U.S., the North American Industry Classification System (NAICS) is used to determine size standards for specific types of businesses, which, in turn, affects your company’s small business definition.
Wondering what defines a small business and whether or not you qualify? Keep reading to learn more.
Key Points
• The Small Business Administration defines small businesses as US-based, independently owned operations organized for profit that contribute to the American economy and meet industry standards.
• North American Industry Classification System establishes size standards for each industry based on number of employees, annual revenue, or combined asset value thresholds.
• Small business classification determines eligibility for tax incentives, SBA loans, grants, federal contracts, and other specialized funding opportunities unavailable to larger companies.
• Size standards vary significantly by industry; for example, cookie manufacturers can employ up to 1,250 workers while machine tool manufacturers are limited to 500.
• The SBA reviews and updates size standards every five years to reflect changing market conditions, technological advancements, and evolving industry capabilities.
How the SBA Defines a Small Business
What is considered a small business? Some people go down the wrong road in search of an answer. For example, it doesn’t have anything to do with sole proprietorship vs LLC. To be classified as small, there are various standards a business must meet.
The Small Business Administration (SBA) says the definition of a small business embraces:
• Operations in the United States
• Independently owned and operated
• Organized for profit
• Contribute to the U.S. economy
However, it doesn’t stop there. The SBA also requires that companies adhere to established size standards for each industry according to the NAICS. Depending on which industry your business is in, it’s possible your company may be too successful to qualify as a small business.
This categorization method is needed because there are many types of businesses, so a universal definition of small business won’t work. You must consider the type of business you’re in before distinguishing whether or not your company can be considered a small business.
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Small Business Size Standards by Industry
Because each industry is very different, the SBA requires small businesses to stay within certain thresholds based on their type of industry. That means either your annual revenue or the number of employees you can have will vary depending on your industry (but for some industries, the amount held in assets is the determining variable).
For example, a cookie and cracker manufacturing company (NAICS code: 311821) can have a maximum of 1,250 employees. It’s not limited in the amount of money it can make or assets it can have to qualify as a small business. This industry is only limited in the amount of employees it can have each year.
Why the Definition of a Small Business Matters
The definition of a small business matters because it establishes whether or not your company can qualify for things like:
• Tax incentives
• Small business loans, such as
• Grants
• Federal contracts
If you exceed the parameters established by the NAICS, you may not be able to take advantage of any of the above.
However, the SBA’s criteria is more about protecting small businesses from large corporations than it is anything else. By ensuring that large companies can’t capture benefits that were never intended for them, it provides a space in the market for smaller, newer companies to grow and thrive.
How to Determine if Your Business Qualifies as Small
To determine if your business qualifies as small, find out what industry you’re in and see what threshold has been established by the NAICS. It’s likely to either be annual revenue or number of employees.
When verifying, make sure you use the most up-to-date of the SBA’s Table of Small Business Size Standards.
Small Business vs. Medium-Sized Business
A small business has access to tax incentives and government funding opportunities that a medium-size company does not. Because they have not exceeded the size limits established by the NAICS, small businesses are considered more vulnerable and in need of capital.
Benefits of Being Classified as a Small Business
While a company wants to grow and thrive, there are some advantages to remaining a small business.
For example, a small business can advantage of:
Then there are business grants and federal contracts to consider, which are tailor made for small businesses. If your company has exceeded the size established by NAICS, then these opportunities are no longer available, but your company should be at a point by then that it no longer needs them.
Challenges Small Businesses Face
While there are various means to receive capital for small businesses, those programs can be difficult to qualify for. Plus, not only do small businesses have to compete with larger, more established companies with greater operational abilities and lower prices, but they have to survive the natural ebbs and flows in cash flow.
The hard truth of the matter is that it’s not uncommon for small businesses to fail. Being able to qualify for SBA loans and contracts is great. But, in the end, they’re still much more vulnerable to market fluctuations.
How Small Business Classification Affects Funding Eligibility
Small business classification affects whether you qualify for SBA-backed financing. While growth is always the goal, there are perks when you’re first starting off, such as the ability to obtain an SBA loan. Once your company grows beyond the established parameters, you’ll have to turn to non-SBA financing.
Regardless of size, however, being classified as small or medium does not affect your ability to get business checking.
How the Definition of a Small Business Has Changed Over Time
Because all industries change over time, the SBA now reviews size standards every five years. As manufacturing and advancements in technology change the market place, the definition of a small business also changes.
For example, feats that were once only possible by larger corporations (such as distributing software to millions of computers), are often quite possible by much smaller companies. Because of this, the definition of a small business must be adaptable to reflect current market conditions and abilities.
The Takeaway
The Small Business Administration uses the table of size standards to determine if a business qualifies as a small business. Depending on your company’s industry, one of these three will have a determining threshold: number of employees, annual revenue, or combined asset value.
If your company does qualify, then you’re eligible to take advantage of SBA loans, grants, government contracts, and tax incentives.
If you’re seeking financing for your business, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your business in minutes.
FAQ
What qualifies as a small business?
To qualify as a small business, your company must operate for profit, have operations in the U.S., contribute to the U.S. economy, and be independently owned and operated. Furthermore, your company must not surpass thresholds related to number of employees, annual income, or amount in assets depending on your industry.
How many employees make a business small?
It depends on which industry your business operates in. Each industry has different thresholds for the amount of employees it can have and still be considered a small business. For example, a glass container manufacturing company can have 1,250 employees, whereas a machine tool manufacturing company can only have 500 employees.
What revenue qualifies as a small business?
As with how many employees a company can have, the amount of annual revenue a company can make and still qualify as a small business depends on what industry the company operates in.
Why is the SBA definition important?
The SBA definition of a small business is important for many reasons, but one of the most significant reasons is that it influences your business’s ability to qualify and receive SBA loans and grants. SBA 7(a), and 504 loans, for example, offer extremely competitive loan terms.
Does the definition of a small business vary by industry?
While there are universal qualifications businesses must meet, there are also industry specific aspects a business must meet, too. Industry specific qualifications revolve around number of employees, annual revenue, or combined assets value. To see which variable will qualify or disqualify your company as a small business, refer to the Table of Small Business Size Standards.
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