The SBA Should Simplify the Definition of “Small Business”

The U.S. Small Business Administration is proposing increasing the size definition of “what is a small business” for three commercial sectors: retail trade; accommodations and food services; and “other services.”  The proposed increases would affect businesses in 71 different NAICS classifications, mostly in retail sectors.

Size standards represent the largest size that a business (including its subsidiaries and affiliates) can be and still be classified as a small business. SBA Administrator Karen Mills (pictured) said the changes would help make SBA lending, assistance and government contract programs available to more small businesses, ultimately helping them to expand and create new jobs during this economic downturn. “This reviewwill ensure SBA is in a position to be a real partner in helping our nation’s entrepreneurs and small-business owners succeed,” Mills said.

“SBA has undertaken a comprehensive review of our size standards to ensure they are current reflect changes in the economy and the marketplace,” Mills added. Size standards in many industries have become outdated due to changing market conditions and business models, but it has been over 25 years since the last overall review of industry size standards took place. (Specific industries have been reviewed from time to time as requested by the public or by federal agencies.)

Ultimately, SBA will perform a comprehensive review of all its small-business size standards to make sure they are based on the latest economic data; these three proposed rules are the first of the series.

But here’s the real question:  why do the size standards have to be so complicated?

I can appreciate that Administrator Mills wants to review the size standards.  She inherited a complex system of size standards, and after 25 years they should be reviewed. Things change over time.

But why should the characterization of what is a “small business” vary by industry or NAICS code in the first place?  That’s what defies a good explanation.

The more complex the definition of the “size of small businesses” …  the more regulatory bureaucracy you need to define, monitor and enforce all those size standards.  It just makes government and government contracting more complex, and then we pay more in taxes to support all that complexity.

On top of that, to the public — and to small business owners — the size standards appear as if they have been chosen arbitrarily.  (Yes, there’s a “size standards methodology” white paper that attempts to justify how size standards are chosen, but it is itself overly complex.)

Instead of making the size standards more complicated, let’s collapse multiple definitions down to one definition for all small businesses — or perhaps a few definitions for certain broad industry categories.  This would make more sense than adding complexity to already-complex rules.

The public will have the chance to review and comment on the SBA’s proposed standards as well as on the data and methodology to be used. The SBA is accepting comments on the proposed rule until December 21, 2009. You can submit your comments at Regulations.gov, or by mail to Khem R. Sharma, chief, Size Standards Division, 409 3rd St. SW, Mail Code 6530, Washington, DC  20416.

You can find out more about the complex size standards that currently exist, at http://www.sba.gov/size.

To learn more about the proposed changes visit the  “What’s New” section at the SBA site.

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