How does the SBA define small business?
What defines a small business
- Be a for-profit organization
- Have a place of business in the U.S. and operate primarily in the U.S.
- Be independently owned and operated
- Have no nationwide dominance in your industry
When you think of a small business, your mind probably recalls a family-run café down the street and not a 1,500-employee petroleum refinery.
The U.S. Small Business Administration (SBA), however, classifies both of these operations as small businesses. With 99.9 percent of all companies in the U.S. considered small businesses, according to a June 2016 SBA report, if you own a company, chances are you qualify as a small business under the SBA definition.
This can open up a world of resources and loans to help you thrive, so it is wise to understand why and how the SBA determines small-business status for your industry.
Small and mighty
Small businesses have been a consistent engine of growth for the U.S. economy.
According to the SBA, the number of small businesses in the U.S. has increased by 49 percent since 1982 and has accounted for 55 percent of all domestic jobs and 66 percent of all net new jobs over the past four decades.
In 2014, the SBA expanded the definition of a small business even wider to encompass more than 8,000 companies that were previously ineligible for small-business classification.
Most people are aware that the SBA guarantees loans to small businesses that lenders otherwise would not be comfortable extending financing to. The scope of the SBA is far wider than just backing loans, however.
The SBA was established in 1953, according to its enabling legislation, “to aid, counsel, assist and protect the interests of small-business concerns; to preserve free competitive enterprise; to insure that small businesses receive a fair portion of the federal government’s purchases; and to maintain and strengthen the nation’s overall economy.”
Thus, in order to research and calculate statistics, determine eligibility for SBA-backed loans and track its small-business contractors, the government needs numerical standards for what constitutes a small business.
The federal government does not have a uniform definition of a small business. From the IRS to the Affordable Care Act, the parameters used to define a small business vary. Even the SBA itself has differing definitions for small businesses depending on its objectives.
For regulation, research and outreach purposes, the SBA defines a small business as “an independent business having fewer than 500 employees.” To be eligible for SBA-backed loans and federal contracting as a small business, the definition varies by industry.
To be a small business in the eyes of the SBA, a company can take any legal form, but must meet the following basic criteria:
- Be a for-profit organization;
- Have a place of business in the U.S. and operate primarily in the U.S. either through financial payments or use of American resources;
- Be independently owned and operated; and
- Not have nationwide dominance in their industry.
The SBA then assesses the company’s size by looking at its average employee count over the past year, or average annual receipts over the past three years. To develop a fairer standard of assessment, companies are segmented by North American Industry Classification System (NAICS) codes, which is an industry-sector description system.
Each business within a specific industry code is assessed by either employee count or revenue size. The full list of NAICS codes, subcategories and their respective small-business size categories can be found on the SBA’s Size Standards Table.
These standards look very different depending on the industry, which is why a civil construction company with $36.5 million or less in annual revenues and a sporting-goods store with fewer than 100 employees can both be considered small businesses within their respective industry classifications.
Federal contractor targets
As the largest employer in the country, the federal government sets annual goals for how many small-business contractors it hires.
These goals are established for various types of small businesses as follows:
- Small businesses in general;
- Small disadvantaged businesses that are majority-owned by socially or economically disadvantaged individuals as defined by the SBA;
- Veteran-owned or service-disabled veteran-owned small businesses;
- Women-owned small businesses; and
- Historically Underutilized Business Zone (HUBZone) businesses located in underserved urban and rural areas.
In 2017, the SBA announced that it had increased its percentage of small-business federal contractors for the fourth year running.
Knowing your eligibility status under SBA rules can help when comparing lenders for business loans. You could potentially qualify for SBA-backed business financing, which generally offers more flexible and affordable loan terms through SBA-approved lenders. The SBA also provides courses, webinars, mentors and other resources to help small businesses grow.