With 28 million small businesses making up 99.7% of all U.S. firms, small business is big for the United States’s economy.
But what exactly do these small businesses look like?
The government—specifically the Small Business Administration—can help you answer that question.
Here’s exactly how the SBA defines small business and why they set these definitions in the first place.
What Defines a Small Business?
The SBA sets numerical definitions, or “size standards,” for every non-profit small business in the United States—based on the business’s number of employees and average annual receipts.
But these size standards aren’t a one-size-fits-all kind of thing.
Instead, the definition of a small business depends on the kind of industry you’re in.
Depending on your industry, a small business could be defined as a maximum of 250 employees or a maximum of 1,500 employees—which might not seem like such a “small” business, at least to a solopreneur.
Or they could be defined by a maximum of $750,000 to $38.5 million in average annual receipts.
Because there’s no one answer for the definition of small business, let’s break down the definition, industry by industry.
The Definition of Small Business, Industry by Industry
The SBA has a comprehensive table of standards, breaking down the acceptable sizes of small businesses by industry (and sub-industries, even).
But here’s a summary of the size definition by larger industries:
- Agriculture: Maximum of $750,000 in average receipts.
- Mining: Maximum of 250 to 1,500 employees depending on subsector within mining.
- Utilities: Maximum number of employees ranges from 250 (for renewable electric power generation subsectors) to 1,000 (for electric power and natural gas distribution businesses).
- Construction: Maximum of $36.5 million in average receipts.
- Manufacturing: Maximum number of employees ranges from 500 to 1,500 (with approximately 27% of all manufacturing businesses having a maximum employee cap at 500 employees).
- Wholesale Trade: Maximum number of employees ranges from 100 to 250.
- Retail Trade: For one-third of all retail trade sub-industries, size standards are set at $7.5 million in average annual receipts. Other industries are defined by 100 to 500 employee maximums.
- Transportation and Warehousing: Maximum number of employees ranges from 500 to 1,500. Some sub-industries in transportation and warehousing are defined by a range of $7.5 million to $37.5 million in average annual receipts.
- Information: Maximum number of employees ranges from 500 to 1,500, depending on the sub-industry. The maximum average annual receipts for this industry ranges from $7.5 million to $38.5 million.
- Finance and Insurance: A maximum of 1,500 employees (for direct property and casualty insurance carriers), and a maximum in average annual receipts ranging from $32.5 million to $38.5 million.
- Real Estate, Rental, and Leasing: A maximum of $7.5 million to $32.5 million in average annual receipts.
- Professional, Scientific, and Technical Services: A maximum of $7.5 million to $20.5 million in average annual receipts, or a maximum of 1,000 to 1,500 employees.
- Health Care and Social Assistance: A maximum of $7.5 million to $38.5 million in average annual receipts.
There are many other sectors that the SBA sets exact size standards for, so check out their table of size standards to see if your specific business makes the cut for small business.
When you take a look at the different size standards defined by the SBA, you might think that all small businesses are actually pretty big in the United States.
However, to put these size standards into context, small businesses with fewer than 20 employees make up 89.6% of all U.S. business enterprises. And on top of that, 23 million businesses in the United States actually have no employees at all—meaning there’s only an owner going about business by themselves.
Beyond hard numbers, the SBA also looks at these qualifications to determine whether a company should be distinguished as a “small business”:
- Whether the company is headquartered in the United States
- Whether it operates primarily in the United States
- Whether it’s a for-profit business
- Whether it’s independently owned and operated
- Whether it’s a minority company in its larger industry
Why Does the SBA’s Size Definition Matter?
Why does the SBA set a cap for small businesses in the U.S.?
The SBA has a set definition for an official small business to help protect and promote small businesses in the larger economy.
The definition of a small business (adjusted by each industry) is an important measure to help the smaller guys go up against the big, market-share holders in their industry.
It’s meant to help small businesses score business loans from the government (or SBA loans), win contracts with the government, and access general tools that can help them compete against larger corporations.
And when you put this in context, when a small business owner running a soda distribution company with only 30 employees needs to acquire a small business loan or strike a deal with a local or state government, they have tools and resources in place to access what they need when they’re going up against Coca-Cola.
But on the flip side of this argument, some businesses with 1,500 employees are still considered “small” and technically have the same protections in place as a 10-person small business in their industry—so sometimes the size standard might not benefit the nation’s smallest businesses.
What Size Is Your Small Business?
If you consider yourself a small business owner, then odds are you probably do run a small business.
However, if there’s a chance that your average annual receipts might tip you over the edge, calculate your business’s size before you apply for any government funding or government contracts.
This could be as easy as checking the SBA’s chart of size standards and adding up the number of people employed by your business, or you might need to do a quick calculation to determine your annual receipts.
Either way, it’s best to be in the know before you apply for business funding!
The post What Is the SBA’s Definition of Small Business (And Why)? appeared first on Fundera Ledger.
from Fundera Ledger https://www.fundera.com/blog/sba-definition-of-small-business