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What Is a Small Business?

If your business is one of 31.7 million small businesses in the United States, it’s important to understand the standards and regulations the Small Business Administration (SBA) and other governing bodies impose on your organization. Depending on factors such as number of employees and business structure, your small business may be eligible for certain financial assistance and other advantages and may be subject to different regulations than larger businesses. 

Understanding what qualifies as a small business can help you maintain compliance with industry regulations and access the best opportunities for growing your business.

The SBA defines a small business in terms of the average number of employees over 12 months or average annual revenue over the past 3 years. Depending on the industry, businesses with fewer than 1,500 average employees and maximum gross receipts of $38.5 million per year may qualify as a small business. Any individual or organization that sells goods or services can be a small business, including sole proprietorships, LLCs, partnerships, corporations and other legal structures, as long as they meet employee and revenue standards.

Related: 10 Steps to Starting a Business

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Small business association criteria

The SBA also considers the following factors in determining small business classification:

  • Location: Has a physical location within the United States
  • Economic operation: Operates primarily within the United States or makes a significant contribution to the nation’s economy through taxes or consumption of U.S. materials or labor
  • Financial motivation: Organized for profit
  • Ownership structure: Independently owned and operated
  • Scale: Not nation-wide dominant in its field 

Related: Small Business Trends: What Are Trends on the Horizon?

NAICS codes

The North American Industry Classification System is a standard system that federal agencies use to classify businesses and organize and analyze data relevant to the U.S. economy. Adopted in 1997, the NAICS system describes your organization’s primary business activities and organizes them within specific numerically-coded groups.

As a small business owner, you’re responsible for assigning your business its NAICS code. You may need to choose more than one code if you operate in multiple niche fields. By classifying your business within a niche, you can compare and analyze metrics across your industry.

For example, some common NAICS codes are:

  • Gas stations: 447110
  • Retail sales: 441110
  • Physicians: 621111
  • Real estate: 531210
  • Software publishers: 511210

Common types of small businesses

Certain industries have few infrastructure or resource requirements to start and, as such, have a relatively large number of small businesses. Many small-scale contractors or organizations may start a small business with few to no employees, basic supplies and low-cost advertising to generate revenue. Some fields that have a large number of small businesses include:

  • Food service
  • Retail
  • Fitness
  • Plumbing, electric and other trades
  • Beauty
  • Web design
  • Childcare
  • Health care
  • Law

Related: Creating a Marketing Strategy for Your Small Business

Advantages of operating as a small business

The SBA classifies organizations as small businesses to help protect and support them within the broader U.S. economy and against larger businesses. These are some of the advantages of operating as a small business.

Government contracts

The SBA Office of Government Contracting and Business Development collaborates with various federal agencies to provide 23% of government contract dollars to small businesses. This helps ensure that small businesses can maintain a competitive edge against large companies and provides business opportunities for underrepresented groups such as:

  • Women-owned small businesses
  • Service-disabled, veteran-owned small businesses
  • Historically underutilized business zones

In addition to contracts, the SBA offers programs to support disadvantaged small business owners in growing their businesses. Eligible individuals can access support such as workshops, counseling and contract opportunities.

Loans

Financing can be a major obstacle for small businesses, but you can access funding through SBA-backed loans. Available through various local lenders in partnership with the SBA, SBA-guaranteed loan options include:

  • 7(a) loans: Loans up to $5 million, typically used for working capital, refinancing debt and purchasing equipment
  • 504 loans: Long-term and fixed-rate financing up to $5 million for major assets that support business growth and job creation
  • Microloans: Loans up to $50,000 that are designated to intermediary lenders to help small businesses start and expand

Compared to other common loan programs, SBA-guaranteed loans typically offer competitive rates and fees. They also come with benefits such as business counseling, low down payments and flexible requirements.

Related: COVID-19: Loans and Additional Funding for Small Businesses [Updated for 2022]

Research grants

The SBA and federal agencies, such as the Department of Energy and the Department of Agriculture, offer a number of research and development programs for small businesses. In addition to contract opportunities, these programs provide businesses with grants to help them expand. Some private grants are also available to small businesses, such as the FedEx Small Business Grant and the Cartier Women’s Initiative.

Related: Programs for the Socially and Economically Disadvantaged in Small Business

Small business definition by industry

The SBA’s full list of industries and small business eligibility to be considered a small business is 41 pages long and includes descriptions of how many employees and total annual revenue a company can have to still qualify as a small business. Some of the standard small business limits for common industries are:

Farming

All forms of crop farming must have less than $750,000 in yearly sales to be considered a small business. There are no employee limits for crop farming businesses.

Manufacturing

Manufacturing businesses can range from a maximum of 500 employees to 1,500 employees, depending on what kinds of products are being manufactured. There are no revenue limits for manufacturing small businesses.

Retail

Businesses that sell goods in a retail environment tend not to have employee limits. The exceptions are fuel dealers, who can have a maximum of 100 employees, and new car dealers, who can have up to 200 employees. Revenue limits range from $7.5 million to $38.5 million.

Arts and entertainment

The SBA doesn’t put a limit on the number of employees an arts, entertainment or recreation-based small business can have. The lowest revenue limit is $7.5 million for independent performers, and the highest is $38.5 million for theme parks and sports teams.

Food service and hospitality

Restaurants, hotels, bars and other small hospitality businesses don’t have a maximum limit on the number of employees. Food service contractors can make a maximum of $38.5 million in revenue, while all other accommodation and food service sectors range from $7.5 million to $32.5 million.

FAQs about small businesses

What is the IRS definition of a small business?

The IRS doesn’t have a single definition of a small business, but it provides small business resources to companies with less than $10 million in assets.

What is the ACA definition of a small business?

According to the Affordable Care Act, any company with fewer than 50 full-time employees is a small business that’s exempt from providing health coverage to its staff.

Related: How Much “Should” Small Business Health Insurance Cost?

Why are small businesses important?

Small businesses generate a significant percentage of new jobs, creating 10.5 million net new jobs, compared to 5.6 million from large businesses, from 2000 to 2019. In addition to the high level of job satisfaction enjoyed by their employees, small businesses account for 44% of U.S. economic activity.

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Frequently asked questions about small businesses

How does the SBA define a small business?

The IRS does not have a single definition of a small business. They do provide small business resources to companies that have under $10 millionin assets.

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