SBA Changes Definition of Small Business: What Does It Mean?

Is Your Company Really a Small Business?

SBA Changes Definition of Small Business: What Does It Mean?

  • 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 three factors: your company type, your average annual revenues and your number of employees.

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, 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

  1. 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.

  2. Government contracts: The SBA offers several government contracts, which can help small businesses compete with larger corporations in their industry.

  3. 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.
  4. Flexibility: Compared to larger companies with more complex internal processes, small businesses can quickly jump on trends and adapt to changes in the market.
  5. Uniqueness: While big businesses may mass-produce 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 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 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 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 employee numbers aren't necessarily fair. Companies with 400 employees could have hundreds of millions in revenue. I think the codes number of employees should be changed to be no more than 200 employees.”

Gimmel also said codes 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 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.

Источник: https://www.businessnewsdaily.com/295-sba-size-standards-small-business.html

What is the Definition of a Small Business? The Answer May Surprise You

SBA Changes Definition of Small Business: What Does It Mean?

What do you think of when you hear the term small business? Some people think sole proprietorship. Other people define the term by the number of employees. However you define it, there are 30.2 million small businesses in the USA. Still, to find a definition of small business that works, we’ll need to delve deeper.

How Do You Define a Small Business?

The definition of a small business depends on a few factors.

The Small Business Administration (SBA) has a table of size standards that helps. It varies by industry but takes into account the number of employees and annual receipts. A small business could set up its business structure as a partnership, sole proprietorship or privately owned corporation. It has less revenue than larger corporations or bigger businesses.

The general rule is a company with less than 500 employees fits the bill. That means a small business definition can include a small corner store that’s owned and operated by one person. The same goes for a local factory producing widgets or a businesses working in the health care or other industries. As long as they employ less than 500 people, they are small businesses.

However, this may be too confining a definition and with the huge differences between industries, an oversimplified one.

Definition of Small Business by Industry

Understanding how the SBA defines a small business doesn’t need to be confusing. These industry examples will help you understand what the SBA considers a small business in a variety of industries.

  • Retail Bakeries: There’s no SBA listing for the average annual receipts for small business here.

    However, you’re allowed up to 500 employees while still being classified as small.

  • Drywall and Insulation Contractors: You can stay small with this business and still make good money. Dry wall and insulation contractors can make up to $16.5 million in average annual receipts and still be considered small.

  • Logging: To qualify as  a small business, there needs to be under 500 employees. However logging companies can make up to $1 million dollars and still be classified as small.
  • Hardware Manufacturing: There are no average annual income numbers listed by the SBA.

    However, a hardware manufacturer can employee up to 750 people and still be considered small. Remember, where there are no average annual earnings listed, the number of employees is used to define a small business’s status.

  • Beef Cattle Farming: You can make up to $1 million in average annual receipts and still be qualified as a small business here.
  • Residential Remodelers: The amount of money you can make here while still being considered a small business is considerably higher. You can make up to $39.5 million in this industry.

    These small businesses thrive when new home sales go down.

  • Tortilla Manufacturing: There are many different industries and categories listed by the SBA under the definitions for small business. The number of employees you can have to qualify is high for this industry at 1,250.

  • Machine Shops: This is a common small business. The SBA can help you open one of these with a loan. The requirements for employees is higher than some of the other small businesses listed here. You can employee up to 500 and still be considered small in this space.
  • Roofing Contractors: This is another small business with high numbers. The average annual receipts here can go as high as $16.5 million. There are quite a few of these home related industries listed.
  • Framing Contractors: This is just such an example. The SBA definition of small business here has a $16.5 million ceiling too.

There are a few other small business administration (SBA) terms you should be familiar with to understand how the agency defines a small business.

Affiliates

Affiliates are companies exhibiting control over other companies by owning a significant stake in the other business. Though this interest is generally less than 50 percent, it is enough to allow one company to control another.

This might happen by an affiliate being able to influence another company’s decisions or policy because of its stake in the company.

However, the affiliate may also exhibit negative control over another company by blocking decisions in another company’s favor.

This is important because the SBA takes all a company’s affiliates into consideration when determining whether it qualifies as a small business. A company may qualify as a small business on its own but when counting up the employees and receipts of all its affiliates, this may no longer be the case.

Annual Receipts

A company’s annual receipts, usually calculated as an average over three to five years, helps the SBA decide whether a company qualifies as a small business. The threshold of annual receipts under which a company is considered a small business varies by industry as seen above.

Employee Statistics

Employee statistics simply refer to the average number of full time employees a company has on the books. The average is generally calculated per pay period. Where a company’s average number of employees falls depending on its industry will generally determine whether it is considered a small business by the SBA.

What is the IRS Definition of a Small Business?

The IRS defines small businesses differently. The agency starts by defining what it considers to be businesses in general. According to the IRS, businesses of any kind are an activity carried out to make a profit.

Different situations determine whether they look at these as a trade or business for tax purposes. You don’t need to make a profit to be on their radar.

However, you need to show that you are making an ongoing effort to make it successful.

Here’s another important point about small businesses according to the IRS. You don’t need to work at your business full time. The IRS wants to know if you’ve got a part time business — even if you’ve got a full-time job and are running your business on the side.

The IRS doesn’t use standard sizes to classify businesses either. Here’s a few things you need to know about their tax system — and how this takes the place of standard sizes. Remember, every business needs to pay taxes. It doesn’t matter what business you’re in.

The business structure you pick affects how you pay your taxes. There are several of these to choose from.

Sole Proprietorship

the name suggests, a sole proprietorship is a business owned by one person. These small businesses are quite often self-employed people. Here’s a list of some of the tax forms you’d need to fill out.

If you fit into this category, you’ll need to drill down a little further. That means deciding whether you’re an independent contractor or in business by yourself. Here’s some more information that can help.

Partnerships

A partnership is another business category recognized by the IRS. Simply put, this is a small business arrangement between two or more people. Under the IRS rules, a married couple can classify a business they share as a partnership. It just can’t be incorporated.

A Limited Liability Company (LLC)

There are special rules for these types of businesses in each state. Check with the one you live in to find out what the requirements are where you live.

Corporations As Small Businesses

The IRS definition of small businesses also includes C corporations and S corporations. There are certain tax requirements with both. For example, a C corporation is usually taxed as an entity separate from its owners while an S corporation does not pay income tax. Instead, income passes through to the owners who pay the taxes their own personal incomes.

How Much Revenue Does a Small Business Make?

According to the Small Business Administration, small businesses can make anywhere between $1 million and $40 million — or a bit more in some cases — depending on the industries in which they operate and still be considered a small business. However, the reality may be quite a bit different.

For example, according to Fundera, the average sole proprietorship with no employees might bring in only $47,000 a year. While the average small business owner might clear $72,000 a year. That includes small business owners who might have a few employees working for them as well.

Another survey suggests 22% of small businesses make under $10,000 a year while just 7% making over $1 million.

Conclusion

From average annual receipts to number of employees, the SBA defines what qualifies as a small business. The small business community may have their own definitions too. However SBA size standards clearly have a huge impact especially when it comes to qualifying for government contracts set aside for small businesses.

Whether you run a soy bean farm or a leather and hide tanning business, the definition small business officials use to define those that fit into the small businesses definition and those that do not can seem confusing.

These size standards affect more than just who gets lucrative government contracts, however. From the health care industry to retail and e-commerce, they also define how we think about small businesses and how we understand their importance to our economy.

Image: Depositphotos.com

Источник: https://smallbiztrends.com/2020/09/small-business-definition.html

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