So often in the business world, we hear the term, but what actually qualifies a business as a “small business”? Does it solely depend on the number of employees or does business revenue play a role? A lot of times business questions are not always the easiest to answer.
There is a lot of confusion about the subject of what qualifies as a small business. Having the designation of a small or large business can have dramatic effects on both the owner and the business. Especially in regards to the taxes and tax breaks that are applicable to you and your business.
Over 90% of all U.S. firms are small businesses, and small business in America is a very big deal. The government created the Small Business Administration (SBA) to create guidelines. Their goal is to help the public to understand how to determine a companies size classification.
SBA’S SMALL BUSINESS DEFINITION
According to the government agency Small Business Administration, they have set numerical and size standards for all non-profit small businesses in America. Most people assume these standards are based on two things, the number of employees and company revenue. They are correct in their assumption, however, the standards vary depending on the industry.
From industry to industry, the definition of “small business” changes. Businesses deemed as being a small business can vary in the number of employees as well as the business’s annual revenue. Some small businesses can only have 250 employees, while other companies might have 1,500 employees. Likewise, some businesses might make $75,000 max annual revenue while another company deemed a small business might do $1 million annually.
In addition to these two varying qualifications, the SBA looks at whether a company operates primarily in the U.S. as well as if it has headquarters located in America. The SBA looks to see if the company is independently owned and operated. Also, the SBA looks to see if the business is a minority company in its larger industry.
WHY THE “SMALL BUSINESS” DEFINITION VARIES
Some people may think that the changing of the definition of “small business” per the industry promotes confusion. In reality, the definition changes per industry in order to add a layer of protection for small businesses against larger businesses.
This adjustment to the definition by industry helps small businesses to secure loans and contracts from the Government. Small businesses now have a way to access tools to help them compete against large corporations. It makes it possible for a company of 30 employees to compete against companies like Pepsi.
The United States currently has over 23 million small businesses that have no employees. This means the company only has an owner to run the whole business. Companies with 1500 employees still have the same protections as this single business owner. So sometimes because of this fact, the smallest business doesn’t always benefit from the size classification.
SMALL BUSINESS DEFINITION BY INDUSTRY
You can find the SBA’s guidelines and standards here. The list is a very comprehensive and useful tool to determine your business classification. Below is a summary of some of the most popular industries and their requirements to qualify as a small business.
- Agriculture – The maximum annual revenue allowed is $750,000 for businesses in the agricultural industry to be deemed a small business.
- Construction – The construction industry allows for a maximum annual revenue of $36.5 million dollars as a small business.
- Finance & Insurance – These industries have a maximum annual revenue range between $32.5 million and $38.5 million. Also for property and casualty insurance carriers, they have a small business cap of 1,500 employees.
- Healthcare & Social Assistance – To be classified as a small business, these industries are capped at a maximum annual revenue range of $7.5 million to $38.5 million.
- Information – Companies in the information industry can have a range of 500 to 1,500 employees, depending on the sub-industry. These small businesses are only allowed a range of $7.5 million to $38.5 million in annual revenue.
- Manufacturing – The manufacturing industry has a range of 500 to 1,500 employees to be considered a small business. About 27% of all manufacturing companies have a maximum of 500 employees.
- Professional, Scientific, & Technical Services -The businesses in these industries can make a max of $7.5 million to $20.5 million annually. These companies also have a 1,000 to 1,500 employee cap set to remain defined as a small business.
- Real Estate, Rentals & Leasing – Businesses in these industries have a $7.5 million to $32.5 million annual revenue maximum in order to be considered a small business.
- Retail Trade – Retail trade has one-third of all sub-industries capped at $7.5 million in annual revenue. The remaining two-thirds are capped at 100 to 500 employees. These are the requirements for them to remain classified as a small business.
- Transportation & Warehousing – These industries allow for a maximum of 500 to 1,500 employees. There are also sub-industries that exist and are defined by a max range of $7.5 million to $37.5 million in annual revenue.
- Utilities – The businesses in the utility industry are classified by the number of employees. Renewable energy generation subsectors are limited to having 250 employees in order to be deemed a small business. Electric power and natural gas distribution businesses, on the other hand, have a maximum allowance of up to 1,000 employees.
- Wholesale Trade – Businesses in this industry can only have 100 to 250 employees to remain classified as a small business.
The type of industry a company is a part of can make a difference in its classification requirements. The number of employees and the amount of annual revenue is also an important factor. These qualities combined, determine a company’s classification as small or large.
In most cases, if you think you and your business qualify as a small business, you are probably correct. Although, the best way to determine your business classification is by visiting the Small Business Administration website and reviewing their table of standards that are relevant to your business.
The definition of small business is both specific at times and vague at others to a certain degree. By understanding your business and the industry you work in, you can better determine your business size classification. There are a few tools available like the Small Business Administration’s table of standards. By using these tools you can gain a clearer picture of what it means to be a small business.