What Constitutes a Small Business?

Posted by Deepshikha Shukla

5-minute read (1,025 words)

You started a business and you’re working to grow it, so you obviously assume you’ve got a small business on your hands. But not every entrepreneurship is designated as an actual “small business.” 

The Small Business Administration (SBA) has a set definition for “small businesses” to help, protect and promote them against the big market-shareholders in their industries. The SBA’s purpose is to help entrepreneurs access the opportunities reserved for small businesses, such as SBA-guaranteed business loans, business disaster loans, awarded contracts from the federal government and free business counseling.

Therefore, a company qualifies for these opportunities as long as it satisfies the SBA's definition and meets the size standards. Following, you’ll find out how you can determine whether you meet those criteria.

Benefits of Owning a Small Business

Entrepreneurs are typically quite eager to apply for SBA awards, but before seeking any government assistance, you must register with the System for Award Management (SAM) to self-certify your business as “small.” This database is used by the government to ensure that the eligible small businesses get at least 23 percent of all federal contracts each year.

Additionally, the government tries to award a certain percentage of all federal prime contracting dollars to small businesses that meet the following socioeconomic conditions with certification.

  • Women-owned small businesses: Five percent
  • Small disadvantaged businesses: Five percent
  • Service-disabled veteran-owned small businesses: Three percent
  • Small businesses in a HUB Zone: three percent

For some large contracts that cannot be awarded directly to small businesses, the government establishes a small business subcontracting program as part of the award. This program directs the prime contractor to award a subcontract to small businesses. To participate in government contracting, business owners must comply with all laws and Federal Acquisition Regulations.

How to Quantify Your Small Business

Your business must meet the SBA size standards to participate in federal contracting programs. A size standard represents the maximum size that a business and its affiliates can be to qualify as a small business. Most manufacturing companies with 500 employees or fewer, and most non-manufacturing companies with average annual receipts under $7.5 million, are designated as small businesses. However, there are exceptions by industry. You can check whether your business qualifies as a small business by using the Size Standards Tool, or by referring to the SBA's table of size standards, using your industry code.

You can find out your industry code via the North American Industry Classification System (NAICS) code list. The system represents the classification of businesses based on the particular product or service they supply. A business can also have multiple NAICS codes if it sells various products and services. Although the NAICS operates on a self-assignment basis, companies can get help from the US Census Bureau in choosing the right code.

The NAICS is updated periodically, and the SBA also keeps its definitions updated on a regular basis. Periodic updates from the SBA take several factors into account, such as inflation. So even if you grew out of a small business designation in prior years, you might qualify as a small business after an SBA update. 

The size standards vary by industry based on the average number of employees over the past 12 months, or the average annual receipts. Start with a quick calculation to determine your average annual receipts and the number of people employed by your business. Then select NAICS codes that best match your business activities. Finally, determine if your business meets the size standards for the selected NAICS codes.

Consider These Caveats

Beyond size standards, the SBA also looks at the following qualifications to determine whether a company qualifies as a small business:

  • The company has a place of business in the US
  • It operates primarily in the US or makes a significant contribution to the US economy through payment of taxes or use of American products, materials or labor
  • It is organized for profit
  • It is an independently owned and operated company and is not dominant in its field on a national basis

The SBA has a comprehensive table of size standards for every industry (and subindustries), along with definitions for a small business in that industry and its NAICS code.

Below, we have listed a few SBA size standards with industry codes to help you understand how you can use the table. There are many other sectors that the SBA sets size standards for, and you can check out those to find out if your specific business qualifies as small.

Small business by sector-1

 

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