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What is the Definition of a Small Business? The Answer May Surprise You

definition of a small business

When you picture a small business, what comes to mind? For most people, the image is likely a solo entrepreneur, or a local company with a handful of employees who are treated like family. Or you might imagine a slightly larger business, with a few district branches and a hundred or so employees. However, as currently defined by the federal government, the definition of a small business is one that has fewer than 500 employees and makes up to $1 million a year in revenue—and there’s a new bill that would broaden that definition up to $10 million a year.

Definition of a Small Business

Well, There Is No Single Definition of a Small Business

Of course, the federal government’s definition of a small business matters for tax purposes. But other organizations that have significant impact on America’s small business landscape disagree with the parameters defined by the government—and in some cases, disagree with themselves.

The Small Business Administration (SBA), for example, holds that a small business has fewer than 500 employees, but there are exceptions—around 1,200 of them. The SBA’s table of size standards assigns different definitions of a small business to every industry. A few of these differences include:

  • Manufacturing: a “small” beet sugar or cane sugar plant can have up to 750 employees, while soybean processing and breakfast cereal manufacturing have up to 1,000.
  • A small petroleum refinery is defined as having up to 1,500 employees.
  • Property and casualty insurance carriers are small when they have less than 1,500 employees.
  • An information technology value-added reseller is only a small business with up to 150 employees.
  • Some definitions are given by revenue: A small sheep or goat farm has revenues up to $750,000, while a small job corps center makes up to $35.5 million.

Then, there are small business advocacy groups. The majority of members in the National Federation of Independent Business, for example, have 20 or fewer employees. The Small Business and Entrepreneurship Council loosely groups businesses into three tiers by number of employees: Fewer than 100 is considered small, a midsized business is 100 to 500, and a company with more than 500 is large.

However, both of these organizations allow any business to join, regardless of size.

Just How Big is Small Business?

Using the sole qualification of less than 500 employees as the definition of a small business, over 99 percent of U.S. businesses are small. The exception is the $1 million revenue mark—but if the bill to raise that threshold to $10 million is passed, the federal government’s definition of “small business” will encompass nearly 97 percent of all companies in America, at least according to the latest Economic Census data.

If the new rules come into play, small business initiatives will be harder to create and apply. Many business owners who truly consider themselves small—as opposed to a company with 500 employees generating $10 million in revenue—may have to compete with these so-called “small” businesses for federal aid and struggle to find the right tax breaks.

What is your definition of small business and how would you define it?

Small Business Owner Photo via Shutterstock


Megan Totka Megan Totka is the Chief Editor for Chamber of Commerce. Chamber specializes in helping SMB's grow their business on the Web while facilitating the connectivity between local businesses and more than 7,000 Chambers of Commerce worldwide. Megan specializes in reporting the latest business news, helpful tips and reliable resources and provides advice through her column on the Chamber blog.

5 Reactions
  1. I’ve always felt the government needed an additional level (for example, micro businesses) for even smaller companies. Those with less than 50 employees or under $500K in annual revenue. Then they could offer additional incentives that would apply only to these businesses as they are in a much more tenuous position than a company with 250 employees.

    • Hi Robert,

      The SBA’s definition of small business is ludicrous. It’s riddled with special-interest exceptions for purposes of government contracting eligibility.

      Most vendor companies define small business as either being under 50 employees or 100 employees. For instance, Microsoft considers 50 employees the cut off, I believe.

      Once you hit 101 employees, you’re getting into “SMB land” or small and midsize businesses. That can be anywhere from 101 employees, all the way up to 1000 employees (I think that’s IBM’s upper limit for SMB).

      Other businesses eschew defining small business by number of employees — for the very reason you mention. Some now try to define businesses by age and stage — startups versus established businesses. Still others define by need and operating process. For instance, some tech companies make a distinction between small businesses that are DIY-ers and those that use trusted IT advisors. That’s because small businesses in those situations operate under very specific assumptions, needs and realities.

      – Anita

  2. Interesting article. As a shepherd who raises registered Shetland Sheep, interested in how many sheep farms earn $750,000. I operate a this farm where we are developing an American Shetland yarn we sell via the internet and fiber festivals and operate a dye studio dyeing a line of yarn I wholesale as well. Just using contracted sales reps, and pattern designers, the business is run mostly by me along with my family. The wave of the future are businesses like these, next to no employees, running lean, doing enough to survive, living by the seat of our pants. This type of business is what will be America, going back to our roots, relying on ourselves, not the government.

  3. Different people may address and define small business as per their own experience. To me, any firm or organization with an employee range between 50-500 can be a good example of a small business. Although there are some set criteria under which a small business falls but sometimes I feel when someone is talking about a small business – how small is actually a small business?

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