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According to the U.S. Small Business Administration (SBA), small businesses account for 99.9% of all businesses in the U.S. But what exactly is a small business?
The SBA sets specific criteria to categorize businesses under the ‘small business’ designation, in order to determine eligibility for support initiatives and funding, like SBA loan programs. Below, we’ll dive deeper into how the SBA defines a small business, so you can determine whether you meet and qualify for certain benefits.
The SBA definition of a small business.
The SBA defines a small business by the maximum number of employees, or maximum amount of annual receipts it has. However, these maximum limits depend upon the industry of the company, which we'll explore below.
Criteria for qualifying as a small business.
The SBA uses two possible size criteria that a business can qualify as “small” under - the Industry Size Standard, and the Alternative Size Standard.
SBA Industry Size Standard
For each industry classified by the North American Industry Classification System (NAICS), the SBA weighs economic characteristics like:
- Degree of competition
- Average business size
- Start-up costs and entry barriers
- Distribution of businesses across the industry by size
- Technological changes
- Competition from other industries
- Growth trends
- Historical activity
- Unique factors
Then, the SBA establishes an industry size standard to define a small business in that industry, consisting of the maximum number of employees, or maximum amount of average annual receipts a business can have to be classified as small.
To find the specific size standard for your industry, here’s what to do.
1. Look up your NAICS code.
You’ll need to have your NAICS code on hand to find your size standards. This is a six-digit code number that helps companies explain what they do. You can use the NAICS search tool to find your industry, or read our guide on how to look up your NAICS code for more information.
2. Look up your SBA industry size standard.
Once you’ve found the NAICS code that best describes the primary activity of your business, or the one that produces the most revenue, you can find the SBA size standards for that industry.
Here’s a sampling of several industries and the maximum average annual receipts or number of employees that qualify them as a small business. In reality, there are hundreds of NAICS codes, so you should look at the complete listing in the SBA table of size standards.
3. Verify you meet the SBA size standard
Confirm your employee count, or your annual receipts meets the industry size standard. You can also use the SBA size standards tool to input your information and find out if you meet the SBA’s criteria for a small business.
In addition to maximum average annual receipts and maximum number of employees, the SBA will consider whether your company meets other eligibility requirements for SBA loans.
SBA Alternative Size Standard
Small businesses can also meet the SBA size requirement through the alternative size standard.
To meet this size standard, the business can’t have a tangible net worth over $20 million dollars, and the average net income after Federal income taxes (excluding carry-over losses) for 2 full years before the application can’t exceed $6.5 million.
Benefits of being classified as a small business.
If the SBA does classify your company as a small business, this opens the door to several resources and benefits.
SBA loans
There are a number of SBA loan programs that offer low rates and longer repayment terms you might not be able to find elsewhere.
The 7(a) loan is the SBA’s most popular program and offers up to $5 million in capital for small business owners. Upon approval, you can use this capital to cover a variety of expenses, such as startup expenses, real estate, short- and long-term working capital, and equipment.
Business development programs.
The SBA has Small Business Development Centers (SBDCs) throughout the U.S. to provide small businesses with counseling, training, and technical assistance. Another organization called SCORE also offers free mentorship and resources. You can utilize these development programs if you qualify as a small business.
Government contracts.
The SBA works partners with federal agencies to award 23% of prime government contract dollars to qualifying small businesses. If you meet the SBA definition for small business, you can submit bids and take advantage of government contracts, which offer an additional, reliable stream of income.
Research grants
The Small Business and Innovation Research research grants are designed to encourage small business owners to dive into technology and commercialization opportunities. While this is a highly competitive program, it also offers small businesses the chance to expand your technological investment and potentially profit from commercialization.
Tax incentives
As a small business, you can also save money with tax incentives. The Small Business Health Insurance Tax Credit, for example, gives eligible small business owners the chance to save up to 50% of employee health care costs, if they buy insurance from the Small Business Health Options Program (SHOP). Some cities, like Philadelphia, also award tax credits to entrepreneurs and small business owners.
Bottom line
If you believe you’re a small business owner, there’s a good chance the SBA does, as well. But your average annual receipts and number of employees may position you as a medium sized or larger business instead. That’s why it’s wise to do some research and determine where you stand. If the SBA does consider you as a small business, you’ll have access to resources, funding options, and incentives that larger businesses won’t qualify for!
