Knowing whether your business is considered small by the Small Business Administration is important, because the official classification has a number of benefits.
- The SBA defines which companies are officially designated as small businesses.
- Whether your business's designation depends on its number of employees or its annual revenue is determined by your industry.
- You can find your industry code in the U.S. Census Bureau's NAICS publication.
- This article is for business owners who are trying to determine whether their organization is technically considered a small business.
People often mistakenly define a company as "small" if it has fewer than a certain number of employees, but the criteria actually depends on the business's industry. The Small Business Administration may not consider you a small business, which can reduce your options for loans and other opportunities.
You can call yourself a small business, but if you don't meet the SBA's definition of one, 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.
How do owners figure out the definition for their businesses?
What is the definition of a small business?
The U.S. Census Bureau has a list of industry codes to help businesses determine their size designation.
"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."
Definition of small business by industry
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. Though size standards vary by industry, they are usually measured by the number of employees or average annual receipts.
The SBA maintains an extensive list of small business size standards that shows the maximum requirements to remain classified as a small business in each sector and subsector.
- Agriculture, forestry, fishing and hunting: No more than $750,000 in average annual receipts.
- Mining, quarrying, and oil and gas extraction: No more than 250 to 1,500 employees depending on your subsector.
- Utilities: No more than 250 employees for renewable electric power generation subsectors, and no more than 1,000 employees for electric power and natural gas distribution businesses.
- Construction: No more than $36.5 million in average annual receipts.
- Manufacturing: No more than 500 to 1,500 employees depending on your subsector.
- Wholesale trade: No more than 100 to 250 employees depending on your subsector.
- Retail trade: No more than $7.5 to $38.5 million in average annual receipts depending on your subsector. Other subsectors have defined employee maximums from 100 to 500.
- Transportation and warehousing: No more than 500 to 1,500 employees depending on your subsector. Some subsectors have maximum average annual receipt limits ranging from $7.5 million to $37.5 million.
- Information: No more than 500 to 1,500 employees depending on your subsector. The maximum average annual receipts ranges from $7.5 million to $38.5 million.
- Finance and insurance: No more than 1,500 employees for direct property and casualty insurance carriers, and a maximum of $32.5 million to $38.5 million in average annual receipts.
- Real estate, rental and leasing: No more than $7.5 million to $32.5 million in average annual receipts.
- Professional, scientific and technical services: No more than $7.5 million to $20.5 million in average annual receipts, or no more than 1,000 to 1,500 employees depending on your subsector.
Management of companies and enterprises: No more than $20.5 million average annual receipts.
Administrative and support, waste management and remediation services: No more than $7.5 million to $38.5 million in average annual receipts depending on your subsector.
- Educational services: No more than $7.5 million to $38.5 million in average annual receipts depending on your subsector.
- Healthcare and social assistance: No more than $7.5 million to $38.5 million in average annual receipts depending on your subsector.
Arts, entertainment and recreation: No more than $7.5 million to $38.5 million in average annual receipts depending on your subsector.
Accommodation and food services: No more than $7.5 million to $38.5 million in average annual receipts depending on your subsector.
- Other services: No more than $7.5 million to $38.5 million in average annual receipts depending on your subsector.
Benefits of being classified as a small business
Loans: Rather than lending money directly to businesses, the SBA works with lenders and essentially acts as a co-signer for small businesses seeking loans. This provides lenders a stronger guarantee that they'll be paid back, which gives small businesses access to better rates than they might receive on their own.
Government contracts: The SBA offers several government contracts, which can help small businesses compete with larger corporations in their industry.
Research grants: Small businesses are eligible for SBIR (Small Business and Innovation Research) grants through the government. These grants encourage small business owners to explore technology and commercialization opportunities.
Flexibility: Compared to larger companies with more complex internal processes, small businesses can quickly jump on trends and adapt to changes in the market.
- Uniqueness: While big businesses may mass-produce out of necessity, small businesses have the freedom to innovate and to connect more closely with their customers' needs.
Key takeaway: The SBA bases its classification of businesses based on employee count and average annual receipts. The definition of a small business differs by industry.
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 told Business News Daily. "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 helps government agencies appropriately award contracts to ensure that eligible small businesses get a piece 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 your eligibility for other opportunities, including certain types of business loans.
Key takeaway: There are advantages to being classified as a small business, including eligibility for federal assistance and various loan programs.
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 businesses" or "microbusinesses" 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.
Key takeaway: A number of business owners aren't pleased with the current calculation formula. Many believe the way it is calculated now isn't fair for very small businesses.
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 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
From just this snippet of codes taken from the 2017 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.
Key takeaway: Within each industry, the North American Industry Classification System has broken up businesses into smaller subclassifications.
How do NAICS codes help you understand whether you're a small business?
The SBA has 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 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 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 $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.
Key takeaway: To determine whether your business is considered small, you can't just look at the industry standards; you need to look at your subclassification's standards.
Do these parameters ever change?
The NAICS is updated periodically. As of 2019, the most recent update to the NAICS was 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.
Key takeaway: The NAICS periodically updates its standards. The last update was in August of 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 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.
Key takeaway: Depending on how the standards change, you may be considered a small business now, even if you weren't previously.
Source interviews were conducted for a previous version of this article.