How ‘Small’ Is a Small Business: The Statistics
Is my business a small business? Seems like a straightforward question, right? Not always. Figuring out the correct answer to this simple question can be a lot more complicated than many business owners realize. It doesn't help that there are quite a few contradictory definitions of small business floating around out there.
Yet it's essential to determine whether your business falls into the small category. Why? Because if you own what's considered a small business by government standards, you may be able to take advantage of an array of government programs, cheap small-business loans and special contracting opportunities (see Start Your Own Small Business).
So back to the original question. Exactly how small is a small business? While some experts say a small business is one with up to 250 employees, others set the number at fewer than 100 workers. Many economists declare small businesses generally take in no more than $10 million in revenue while others argue it's less than $1 million. With so many discrepancies, where can you turn for the true definition of a small business? Look no further than the Small Business Administration (SBA).‘Small' as Defined by the SBA
The U.S. government has strict sizing rules and regulations that define a small business, and the Small Business Act outlines a broad definition of these types of businesses. You should visit the Small Business Administration (SBA) website where the SBA publishes its own detailed size standards for whether a business is deemed small.
The SBA has established two widely used sizing criteria for small businesses
- No more than 500 employees (for most manufacturing and mining industries)
- No more than $7.5 million in average annual receipts (for many nonmanufacturing industries)
Unfortunately, even the SBA's definition of a small business isn't exactly clear-cut, as there are quite a few exceptions to these two general rules. To figure out where your business falls, first you'll have to figure out your North American Industry Classification System (NAICS) code.Cracking NAICS Codes
The SBA organizes companies according to NAICS codes, which are used by the federal government to classify businesses. For each NAICS code, the SBA decides if a business should be classified as a small business based on revenue or number of employees. The administration then sets a limit for each NAICS code to determine whether a business is considered small.
As mentioned earlier, most manufacturing companies with fewer than 500 employees are considered small businesses by SBA standards and many nonmanufacturing industries are defined as small if the annual receipts are less than $7.5 million. However, note the words most and many in these descriptions. If your manufacturing business falls under certain NAICS codes, the sizing standards may be different.
For example, if you own a Cookie and Cracker Manufacturing company (NAICS 311821), you can have up to 750 employees and still be considered a small business. By the same token, if you own a Furniture Store (NAICS 442110), you are considered a small business as long as your average annual revenue is less than $20.5 million. To find the official list of SBA size standards by NAICS codes, see the SBA's Table of Small Business Size Standards.Crunching the Numbers
Once you've pinpointed your NAICS code, you'll need to do the math to figure out if your business is considered small. Let's say you fall under a NAICS code in which business size is based on revenue. How do you know if you make the cut? The SBA calculates your average annual revenue using a three-year average of your annual receipts as defined by the IRS. To figure out your annual receipts, you'll need to take a look at your tax returns for the past three years. For each tax return, add up the total receipts line and cost of goods sold line. Then take the average of the total amounts for the past three years. If your final answer is less than the SBA revenue limit, congratulations! You're officially considered a small business (see 5 Tax Breaks Overlooked by Small Business Owners).
On the other hand, if you fall under a NAICS code that uses the number of employees as the metric for business size, you're in luck. Figuring out this number is much easier. The SBA simply counts your average number of employees during the previous 12 months. This includes full-time, part-time and temporary employees. For example, if over the past year you had 30 full-time employees, 15 part-timers and 5 temps, your total employee count is 50.Size Shifts
To make things even more confusing, SBA's size standards are constantly changing. Most recently, in July 2014, the SBA released an updated small business sizing formula. As a result, thousands of companies previously considered too big to qualify for SBA programs were suddenly redefined as small businesses – and these small businesses gained access to cheaper funding and beneficial government programs.
This is why it's important to keep tabs on current SBA size standards. The SBA maintains a current table of small business size standards that includes all changes made since January 1 of the most recent year.The Bottom Line
Unfortunately, there's no overarching magic number to help you figure out whether you're a small business. As a result, you're probably going to have do some homework to determine how your company is classified. Sizing standards vary depending on your industry and other factors, and they are constantly changing. To find the latest and greatest standards, visit www.sba.gov/size. For more specific details by industry, check out the SBA's Summary of Size Standards by Industry Sectors.