The Small Business Administration (SBA) may not consider you a small business, which can reduce your options for loans and other opportunities.
- The SBA defines which companies are officially designated as small businesses.
- Whether your business's designation depends on the number of employees or annual revenue is decided by your industry.
- You can find your industry code via the U.S. Census Bureau's NAICS publication.
- Some small businesses have annual revenues of $40 million or more.
To many owners' surprise, the definition of a small business differs considerably depending on the industry. People often mistakenly define a company as small if it has fewer than a certain number of employees, but the criteria depend on the industry.
You can call yourself a small business, but if you don't meet the Small Business Administration's definition of one, you can lose out on some opportunities. The SBA's size standards for small businesses are based on three factors: your company type, your average annual revenues and the number of employees.
How do owners figure out the definition for their businesses?
The U.S. Census Bureau has a list of industry codes to assist business owners in determining their company's size.
"The definition of small business is dependent on which industry code a company is in," said Molly Gimmel, owner of Design to Delivery.
"My company's primary code is 541611," Gimmel told Business News Daily. 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."
Why is this definition important?
A business's size definition influences which companies it will compete against for federal assistance.
"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. That ensures they can still compete for the small business set-aside contracts."
If you want to be awarded contracts from the federal government, you must register with the System for Award Management. This database is used to help government agencies appropriately award contracts to ensure that eligible small businesses get a cut of this pie. In fact, the SBA partners with the government to ensure that small businesses get about 23% of these contracts.
Your status as a small business also determines whether you're eligible for other opportunities, including certain types of business loans.
Are business owners OK with these definitions?
Not all business owners are fans of the SBA's size rules.
"There are thousands of small business owners like me that don't really benefit from any initiatives the government offers or the local government offers," said Keith Scandone, owner of Philadelphia-based branding communications agency O3 World.
Several small business owners told Business News Daily that they would like to see size standards that would help "very small" or "micro" businesses that have fewer than 100 employees.
"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 based 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.
How do the industry codes and definitions work?
The SBA bases its definitions on categories set by the North American Industry Classification System (NAICS). This system was developed by various federal agencies. It's used in statistical analysis and the classification of businesses for revenue, tax and other purposes.
What are NAICS codes?
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 are 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 have the following:
- 44221 – Floor covering stores
- 442210 – Floor covering stores
- 44229 – Other home furnishings stores
- 442291 – Window treatment stores
- 442299 – All other home furnishings stores
You can see from just this snippet of codes taken from the 2017 NAICS that it can be complicated to determine which code applies to your business. And if you own a company that operates multiple lines of business, you may need to select more than one code. The system is operated on a self-assignment basis, but companies can get help from the Census Bureau in choosing the right code by emailing NAICS@census.gov or calling 1-888-756-2427.
How do NAICS codes help you understand whether you're a small business?
The SBA published a table of small business size standards. It lists every potential NAICS code, along 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 200 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 Card Dealers (441120) are not defined by the number of employees. Rather, they are considered small businesses if their average annual revenues are $27 million or less.
Some revenue thresholds are much smaller than others. Cotton farms, beef cattle ranches and poultry hatcheries are considered small businesses only if their annual revenues are under $1 million, but companies that engage in chicken egg production can have revenues as high as $16.5 million and still be considered small businesses.
Do these parameters ever change?
The NAICS is updated periodically. As of 2019, the most recent update to the NAICS was made in 2017. Prior to that, it was updated in 2014.
The SBA also updates its definitions from time to time. The last update to its table of size standards was published on Aug. 19, 2019.
Can you fall back into being a small business?
Periodic updates from the SBA take factors such as inflation into account. Specifically, 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 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.