In the United States, small business is a big business. Up to 99.7% of all US companies—28 million in all—can be classified as small businesses.
While the breadth of firms that fall under the definition of “small business” is expansive, it is by no means a default classification. Small businesses must meet certain requirements to qualify as such. But who sets these requirements?
Enter the US Small Business Administration. The SBA is one of a number of federal agencies that regulate and provide support to entrepreneurs and—you guessed it—small businesses. The SBA sets standards for the size of small businesses depending on the industry. For example, if you’re a soybean farmer, you have a small business only if your annual receipts total less than $1 million. However, if you’re generating nuclear power, your business is considered “small” as long as you have fewer than 750 employees.
What qualifies as a small business?
Generally speaking, the SBA defines a small business as one that employs fewer than 1,500 people and generates a maximum annual revenue of $41.5 million (as of 2017). The SBA also considers location, financial motivation, structure, and ownership identity when determining whether to classify a company as a small business.
- Location. Is the company headquartered in the United States? Does it operate primarily in the United States?
- Financial motivation. Does it operate as a for-profit business or non-profit organization?
- Ownership structure. Is it independently owned and operated?
- Ownership identity. Is the business owned by minorities relative to the broader industry? (For example, if an industry is dominated by men, female ownership would be considered “minority” for SBA purposes.)
Limits on small businesses by industry
The SBA sets standards in terms of business size and scope on an industry-by-industry basis. The agency looks at two considerations—number of employees and average annual receipts.
The SBA publishes a comprehensive table of standards defining acceptable sizes for a qualifying small business’ workforce, and/or how much money they generate in average receipts. Some of these standards are ranges, with subclasses within an industry qualifying at varying levels. The list is exhaustive, but here is an overview of maximum workforce sizes in certain prominent industries (as of 2017):
- Manufacturing: 500 to 1,500 employees, with 27% capped at 500.
- Construction: Up to $36.5 million a year in average receipts.
- Retail: Up to $7.5 million in average annual receipts for one-third of all retail trade subclasses. There is no cap on workforce.
- Finance and insurance: Up to 1,500 employees for direct property and casualty insurance carriers. Up to a range of $32.5 million to $38.5 million in average annual receipts.
- Real estate: Up to a range of $7.5 million to $32.5 million in average annual receipts.
- Health care: Up to a range of $7.5 million to $38.5 million in average annual receipts.
- Science and technology: Up to a range of $7.5 million to $20.5 million in average annual receipts, or a maximum of 1,000 to 1,500 employees.
- Information sector: Up to a range of 500 to 1,500 employees. Up to a range of $7.5 million to $38.5 million in average annual receipts.
- Shipping and cargo: Up to a range of 500 to 1,500 employees, with some subclasses limited to a range of $7.5 million to $37.5 million in average annual receipts.
- Wholesale: Up to a range of 100 to 250 employees.
- Agriculture: Up to $750,000 in average annual receipts.
As there are many industries covered by SBA standards, and a number of subclasses within each industry, it is best to consider the entire table to identify the framework applying to your own field.
What are NAICS codes?
Industries and subclasses of industry are classified for SBA benefit purposes by the North American Industry Classification System, or NAICS.
The NAICS sorts businesses into industries and assigns those groupings numerical codes. These codes are highly specific and target niche subclasses of industry. For example, 44221 applies to retail operations providing floor coverings, while 44229 applies to stores that sell general home furnishings and 442291 applies to stores that sell window treatments.
NAICS codes allow small business owners to identify whether their metrics align with industry-by-industry qualifications for SBA treatment.
NAICS codes are updated every so often, sometimes with changes made to qualification parameters—such as changing average annual receipt requirements to reflect fluctuations in inflation. The list was updated in 2017 and, prior to that, in 2014.
Small business owners self-select their NAICS classification. If your small business operates in multiple fields, you may need to choose more than one. You can get assistance from the US Census Bureau in selecting the right code or codes by emailing NAICS@census.gov, or calling (888) 756-2427.
What are the advantages of operating as a small business?
The primary advantage of receiving a “small business” designation from the SBA are opportunities for federal financial assistance and being awarded contracts from government agencies.
To be awarded a contract from the federal government, you must register your small business with the System for Award Management—a database through which the government tracks equity in distributing contracts between US businesses of varying sizes. SBA-designated small businesses are awarded 23% of all federal government contracts.
Small business status may also render your company eligible for certain types of federally backed loans. SBA loans typically enjoy lower rates and longer terms than those offered by conventional lenders. It may also be easier for your small business to qualify for such a loan than one offered by a big, private bank. Small businesses can also access other kinds of loans, such as Shopify Capital which grants vendors cash advances based on previous sales.
Ultimately, the amount you can borrow will depend on the type of SBA loan you are able to apply to, depending on the industry, NAICS classification, and any accompanying limitations.