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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 [1] (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 [2] assigns different definitions of a small business to every industry. A few of these differences include:

Then, there are small business advocacy groups. The majority of members in the National Federation of Independent Business [3], for example, have 20 or fewer employees. The Small Business and Entrepreneurship Council [4] 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 [5].

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

Small Business Owner [6] Photo via Shutterstock