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

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What do you think of when you hear the term small business? Some people think sole proprietorship. Other people define the term by the number of employees. However you define it, there are 30.2 million small businesses in the USA. Still, to find a definition of small business that works, we’ll need to delve deeper.

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How Do You Define a Small Business?

The definition of a small business depends on a few factors.

The Small Business Administration (SBA) has a table of size standards that helps. It varies by industry but takes into account the number of employees and annual receipts. A small business could set up its business structure as a partnership, sole proprietorship or privately owned corporation. It has less revenue than larger corporations or bigger businesses.

The general rule is a company with less than 500 employees fits the bill. That means a small business definition can include a small corner store that’s owned and operated by one person. The same goes for a local factory producing widgets or a businesses working in the health care or other industries. As long as they employ less than 500 people, they are small businesses.

However, this may be too confining a definition and with the huge differences between industries, an oversimplified one.

Definition of Small Business by Industry

Understanding how the SBA defines a small business doesn’t need to be confusing. These industry examples will help you understand what the SBA considers a small business in a variety of industries.

• Retail Bakeries: There’s no SBA listing for the average annual receipts for small business here. However, you’re allowed up to 500 employees while still being classified as small.
• Drywall and Insulation Contractors: You can stay small with this business and still make good money. Dry wall and insulation contractors can make up to $16.5 million in average annual receipts and still be considered small.
• Logging: To qualify as  a small business, there needs to be under 500 employees. However logging companies can make up to $1 million dollars and still be classified as small.
• Hardware Manufacturing: There are no average annual income numbers listed by the SBA. However, a hardware manufacturer can employee up to 750 people and still be considered small. Remember, where there are no average annual earnings listed, the number of employees is used to define a small business’s status.
• Beef Cattle Farming: You can make up to $1 million in average annual receipts and still be qualified as a small business here.
• Residential Remodelers: The amount of money you can make here while still being considered a small business is considerably higher. You can make up to $39.5 million in this industry. These small businesses thrive when new home sales go down.
• Tortilla Manufacturing: There are many different industries and categories listed by the SBA under the definitions for small business. The number of employees you can have to qualify is high for this industry at 1,250.
• Machine Shops: This is a common small business. The SBA can help you open one of these with a loan. The requirements for employees is higher than some of the other small businesses listed here. You can employee up to 500 and still be considered small in this space.
• Roofing Contractors: This is another small business with high numbers. The average annual receipts here can go as high as $16.5 million. There are quite a few of these home related industries listed.
• Framing Contractors: This is just such an example. The SBA definition of small business here has a $16.5 million ceiling too.

There are a few other small business administration (SBA) terms you should be familiar with to understand how the agency defines a small business.

Affiliates

Affiliates are companies exhibiting control over other companies by owning a significant stake in the other business. Though this interest is generally less than 50 percent, it is enough to allow one company to control another. This might happen by an affiliate being able to influence another company’s decisions or policy because of its stake in the company. However, the affiliate may also exhibit negative control over another company by blocking decisions in another company’s favor.

This is important because the SBA takes all a company’s affiliates into consideration when determining whether it qualifies as a small business. A company may qualify as a small business on its own but when counting up the employees and receipts of all its affiliates, this may no longer be the case.

Annual Receipts

A company’s annual receipts, usually calculated as an average over three to five years, helps the SBA decide whether a company qualifies as a small business. The threshold of annual receipts under which a company is considered a small business varies by industry as seen above.

Employee Statistics

Employee statistics simply refer to the average number of full time employees a company has on the books. The average is generally calculated per pay period. Where a company’s average number of employees falls depending on its industry will generally determine whether it is considered a small business by the SBA.

What is the IRS Definition of a Small Business?

The IRS defines small businesses differently. The agency starts by defining what it considers to be businesses in general. According to the IRS, businesses of any kind are an activity carried out to make a profit. Different situations determine whether they look at these as a trade or business for tax purposes. You don’t need to make a profit to be on their radar. However, you need to show that you are making an ongoing effort to make it successful.

Here’s another important point about small businesses according to the IRS. You don’t need to work at your business full time. The IRS wants to know if you’ve got a part time business — even if you’ve got a full-time job and are running your business on the side.

The IRS doesn’t use standard sizes to classify businesses either. Here’s a few things you need to know about their tax system — and how this takes the place of standard sizes. Remember, every business needs to pay taxes. It doesn’t matter what business you’re in.

The business structure you pick affects how you pay your taxes. There are several of these to choose from.

Sole Proprietorship

Like the name suggests, a sole proprietorship is a business owned by one person. These small businesses are quite often self-employed people. Here’s a list of some of the tax forms you’d need to fill out. If you fit into this category, you’ll need to drill down a little further. That means deciding whether you’re an independent contractor or in business by yourself. Here’s some more information that can help.

Partnerships

A partnership is another business category recognized by the IRS. Simply put, this is a small business arrangement between two or more people. Under the IRS rules, a married couple can classify a business they share as a partnership. It just can’t be incorporated.

A Limited Liability Company (LLC)

There are special rules for these types of businesses in each state. Check with the one you live in to find out what the requirements are where you live.

Corporations As Small Businesses

The IRS definition of small businesses also includes C corporations and S corporations. There are certain tax requirements with both. For example, a C corporation is usually taxed as an entity separate from its owners while an S corporation does not pay income tax. Instead, income passes through to the owners who pay the taxes out of their own personal incomes.

How Much Revenue Does a Small Business Make?

According to the Small Business Administration, small businesses can make anywhere between $1 million and $40 million — or a bit more in some cases — depending on the industries in which they operate and still be considered a small business. However, the reality may be quite a bit different.

For example, according to Fundera, the average sole proprietorship with no employees might bring in only $47,000 a year. While the average small business owner might clear $72,000 a year. That includes small business owners who might have a few employees working for them as well.

Another survey suggests 22% of small businesses make under $10,000 a year while just 7% making over $1 million.

Conclusion

From average annual receipts to number of employees, the SBA defines what qualifies as a small business. The small business community may have their own definitions too. However SBA size standards clearly have a huge impact especially when it comes to qualifying for government contracts set aside for small businesses.

Whether you run a soy bean farm or a leather and hide tanning business, the definition small business officials use to define those that fit into the small businesses definition and those that do not can seem confusing.

These size standards affect more than just who gets lucrative government contracts, however. From the health care industry to retail and e-commerce, they also define how we think about small businesses and how we understand their importance to our economy.

Image: Depositphotos.com

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