What is a Small Business?

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Written by Charley Blewett

Digital marketing guy, WordPress theme designer, and content developer.

November 12, 2020

How is a business defined as Small?

The SBA’s Small Business Classifications

The Small Business Administration — SBA for short, defines businesses that qualify for its assistance programs by either the dollar amount of annual gross revenue (Plus any COGS added back) or by the number of employees a company retains. They use the North American Industry Classification System — NAICS for short, to define a company’s industry classification and assign a numbering system. Then they use one of the qualification metrics of revenue or number of employees to calculate the maximum allowance to qualify for these Small Business programs funded or guaranteed by federal tax dollars.

The SBA Table of Small Business Size Standards

To use the Table of Small Business Size Standards Matched to North American Industry Classification System Codes, you will need to find your company’s NAICS number. They are conveniently divided up into 24 sectors to define industry groups. Most sectors include many subsectors in the numbering system. For example, NAICS number 236115 = New single-family general contractors, NAICS number 445120 = Convenience Stores, and NAICS number 541110 = Offices of lawyers.

NAICS Sectors
Sector No. Description
11 Agriculture, Forestry, Fishing and Hunting
21 Mining, Quarrying, and Oil and Gas Extraction
22 Utilities
23 Construction
31 – 33 Manufacturing
42 Wholesale Trade
44-45 Retail Trade
48-49 Transportation and Warehousing
51 Information
52 Finance and Insurance
53 Real Estate and Rental and Leasing
54 Professional, Scientific, and Technical Services
55 Management of Companies and Enterprises
56 Administrative and Support and Waste Management and Remediation
Services
61 Educational Services
62 Health Care and Social Assistance
71 Arts, Entertainment, and Recreation
72 Accommodation and Food Services
81 Other Services (except Public Administration)
92 Public Administration

Let’s look at a few SBA Table of Size Examples

Sector 23 – Construction
NAICS codes NAICS U.S. industry title Size standards in millions of dollars Size standards in number of employees
236115 New Single-family Housing Construction $39.5 N/A
Sector 31 – 33 – Manufacturing
NAICS codes NAICS U.S. industry title Size standards in millions of dollars Size standards in number of employees
311351 Chocolate and Confectionery Manufacturing N/A 1,250
Sector 44 – 45 – Retail Trade
NAICS codes NAICS U.S. industry title Size standards in millions of dollars Size standards in number of employees
444110 Home Centers $41.5 N/A

As you can see, the defining factors of either your company’s annual gross revenue (plus any Costs Of Goods Sold added back in) or the total number of employees to qualify for SBA programs varies depending on your company’s industry. This gives a good insight into defining the concept of a small business by considering an industry’s overhead and other expenses or by the burden of supporting employees. The SBA defines Annual Receipts as:

Annual receipts: This is the “total income” (or “gross income”) plus the “cost of goods sold.” These numbers can normally be found on the business’s IRS tax return forms. Receipts are averaged over a business’s latest three complete fiscal years or (except in the Business Loan and Disaster Loan Programs) five complete fiscal years to determine the average annual receipts. If a business hasn’t been in business for five years, multiply its average weekly revenue by 52 to determine its average annual receipts.
The SBA calculates annual receipts in accordance with 13 CFR 121.104.
SBA Size Standards

And Employee Calculations as:

Employee calculation: This is the average number of people employed for each pay period over the business’s latest 12 calendar months. Any person on the payroll must be included as one employee regardless of hours worked or temporary status. The number of employees of a concern in business less than 12 months is the average for each pay period that it has been in business.
The SBA calculates number of employees in accordance with 13 CFR 121.106.
SBA Size Standards

As you can see, small is not necessarily tiny when it comes to definitions that take into account the industry norms in either gross income or number of employees. A general contractor who has $35.9 million in annual gross income, averaged over the prior 3 years, may have expenses that greatly reduces the net income generated by their efforts. These come in the form of high Workers Comp Insurance rates and other overhead that you may not realize exist to successfully run this business. The SBA takes these and other factors into account when classifying for profit companies as small businesses.

Thank you for your time in reading this article. If you have any questions, Manuel and I will be more than happy to do our best at providing you a prompt answer.

References

Here is a list of all references used

  1. NAICS Manual
  2. SBA Table of size standards reference page
  3. SBA Table of Small Business Size Standards Matched to North American Industry Classification System Codes
  4. SBA Size standards details page

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