You can call your company a small business, but if you don’t meet the SBA’s definition you could lose out on some opportunities. The SBA’s standards for small businesses are based on three factors: your company type, your average annual revenues and your number of employees. Is your business truly small? Read on to find out.
To qualify as a small business, a company must fall within the size standard, or the largest size a business may be to remain classified as small, within its industry.
The U.S. Census Bureau provides a list of industry codes to help businesses determine their size designation, and the SBA maintains an extensive list of small business size standards with the maximum requirements to remain classified as a small business in each sector and subsector.
“The definition of ‘small business’ is dependent on which industry code a company is in,” said Molly Gimmel, CEO of Design to Delivery. “My company’s primary code is 541611. In that industry, a small business is defined as one with average revenues, based on the past three completed fiscal years, that are less than $16.5 million.”
Though size standards vary by industry, they are usually measured by the number of employees or average annual receipts. The current SBA business size standards include the following.
Business size classification isn’t frivolous. Being classified as a small business comes with certain benefits, so it’s important to know if your business qualifies. Here are some of the benefits small businesses can enjoy.
In addition to these tangible benefits, small businesses tend to be more flexible and adaptable than large companies, allowing them to pivot as needed amidst changing economic conditions. Moreover, small businesses tend to be innovative laboratories that experiment with new ideas – some of which may disrupt entire industries.
The SBA bases its definitions on categories set by the North American Industry Classification System (NAICS). Various federal agencies developed this system. It’s used in statistical analysis and the classification of businesses for revenue, tax and other purposes.
The NAICS divides businesses into industries and further into subclassifications and even further subclassifications. For example, sectors 44 and 45 are retail trade businesses. Furniture and home furnishings stores are a subclass of sector 44 and denoted by codes that start with 442. That subclass is further divided into 4421 (furniture stores) and 4422 (home furnishings stores).
But even those classifications are further divided. Under furniture stores, for example, you might see the following codes:
From just this snippet of codes taken from the 2022 NAICS, you can see how complicated it can be to determine which code applies to your business – and if your company operates multiple lines of business, you may need to select more than one code.
The system operates on a self-assignment basis, but you can get help from the Census Bureau in choosing the right code by emailing NAICS@census.gov or calling 1-888-756-2427.
The SBA provides a table of small business size standards. It lists every potential NAICS code, with definitions for a small business in that industry. Depending on the industry, the defining factor is either revenue or number of employees.
For example, businesses that fall under code 424110 (printing and writing paper merchant wholesalers) are considered small businesses if they have 225 or fewer employees. But fish and seafood merchant wholesalers (424460) are no longer considered small businesses once they have more than 100 full-time employees.
Sometimes the standards can seem contradictory and frustrating. Consider that new car dealers (441110) are small businesses as long as they have 200 or fewer full-time employees, but used car dealers (441120) are not defined by their number of employees. Rather, they are considered small businesses if their average annual revenues are $27 million or less.
Some revenue thresholds are much lower than others. Cotton farms, beef cattle ranches and poultry hatcheries are considered small businesses only if their annual revenues are under $2.75 million, $2.25 million and $3.5 million, respectively. However, companies that engage in chicken egg production can have revenues as high as $16.5 million and still be considered small businesses.
The NAICS is updated periodically. The most recent update to the NAICS was in 2022. The SBA also updates its definitions from time to time. The last update to its table of size standards was published on July 14, 2022.
Periodic updates from the SBA take factors such as inflation into account. The SBA understands that earning $1 million 15 years ago is different from earning $1 million today. If you grew out of a small business designation in prior years, it’s worth checking the definitions for your NAICS classification anytime there’s an SBA update. You may find that you now qualify as a small business again, even if you have experienced stable revenue or slight growth.
If your business has grown over time, it could still qualify as a small business based on SBA definitions. In that case, you have access to certain government benefits that are off-limits to larger companies. Check the SBA’s standards and the Census Bureau’s NAICS codes every few months to keep your status up to date and take advantage of any resources available.
Source interviews were conducted for a previous version of this article.