To many an owner’s surprise, the definition of a small business differs considerably depending on the industry in which it competes.
People often mistakenly define a business as small if it has fewer than 500 employees. This figure applies to only certain industries, such as manufacturing or mining.
The Small Business Administration’s size standards for small businesses are based on average annual revenues and number of employees.
A business must make between or below $750,000 and $35.5 million and have between or below 100 and 1,500 employees depending on the industry. For example, a business that generates $1 million in revenue in an industry with a $750,000 size standard would not be considered “small.”
How do owners figure out the definition for their businesses?
The U.S. Census Bureau has a list of industry codes to assist businesses in determining their size.
“The definition of small business is dependent on which industry code a company is in,” said Molly Gimmel, owner of Design to Delivery, a Maryland-based consulting firm that navigates businesses through the government procurement process and tries to help them win and manage government contracts.
Definitions for each code can be found on the SBA’s website.
“My company’s primary code is 541611,” Gimmel told BusinessNewsDaily. “In that industry, a small business is defined as one whose average revenues — based on the last three completed fiscal years — is less than $7 million.”
Why is this definition important?
A business’s size definition influences which companies it will compete against for the billions of dollars in federal assistance set aside for small businesses.
“The size standards are important for government contractors because they define if a company is a small business for a specific procurement,” Gimmel said.
“Business owners strategically try to limit their growth so they will stay under the threshold for as long as possible so they can still compete for the small business set-aside contracts.”
Are business owners OK with these definitions?
Not all business owners are fans of SBA’s size rules.
“There are thousands of small business owners like myself that don’t really benefit from any initiatives the government offers or the local government offers,” said Keith Scandone, owner of branding communications agency O3 World in Philadelphia. His business employs 10 workers.
Several owners told BusinessNewsDaily they would like to see size standards that would help “very small” or “micro” businesses, which have employee numbers in the single- and double-digit range.
“I think the codes should be changed,” Gimmel said. “The ones that are based on employee numbers aren’t necessarily fair. Companies with 400 employees could have hundreds of millions in revenue. I think the codes based on number of employees should be changed to be no more than 200 employees.”
Gimmel also said codes bases on revenue should be changed to give small businesses a chance to compete fairly. She recommended an increase to as much as $25 million for all industries.
Have the definitions recently changed? Or will they in the future?
Earlier this month, the SBA changed some size standards to reach out to more companies in three commercial sectors, affecting businesses in retail trades, accommodations and food services and other industries.
The changes — sparked by the first comprehensive review of size standards in more than 25 years — will broaden businesses' eligibility for financial assistance, contracts and more programs from the SBA and other federal agencies. In 2004, the SBA rejected a proposal that would have broadly defined small businesses at a 100-employee limit and eliminated dollar-denominated size standards.
Officials proposed reviewing size standards, based on industry-specific data, in October 2009. SBA chief Karen Mills said in a statement on Oct. 6, 2010, that the administration wanted to make sure "the factors that determine eligibility are aligned with current economic and industry indicators, and ensure that small businesses across the country have the tools they need to drive economic growth and create jobs.”
Public and federal agencies request these reviews of the standards, and the SBA makes periodic inflation adjustments to its revenue size standards. The latest adjustments were published in the Federal Register in summer 2008.
Provisions in the Small Business Jobs Act of 2010 require the SBA to continue reviewing size standards for several more years.
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Reach BusinessNewsDaily staff writer Brian Anthony Hernandez at Bhernandez@TechMediaNetwork.com. Follow him on Twitter (@BAHjournalist) and become his friend on Facebook (BAH Journalist) to interact or stay updated on news about small businesses.