Understanding the SBA's Definition of Small Business and Why it Matters

There’s a wealth of resources out there for small businesses. If your organization falls under the SBA's small business definition, learn how you can take advantage of all the available benefits.

America is a nation of entrepreneurs. Small businesses make up more than 99 percent of businesses and create 65 percent of new jobs in the U.S., according to the Small Business Administration (SBA).

Yet the bootstrap, go-it-alone mentality that drives so many entrepreneurs to launch their businesses can get in their way as they encounter the inevitable challenges of development and growth.

Because the small business sector creates so much value, many government agencies and private organizations provide resources to help them grow and succeed. Small businesses that take advantage of these resources dramatically increase their chances of success over the long haul.

What qualifies as a small business?

The SBA defines small businesses broadly as those with fewer than 500 employees, and startups as those in business for a year or less. Yet what constitutes “small” in a retail shop as opposed to a utility is a very different matter. So the SBA provides more refined definitions for every business type based on either number of employees or annual receipts.

While authorities such as the Internal Revenue Service and Equal Employment Opportunity Commission measure businesses by varying standards, the SBA’s small business definition is most widely used to allocate government and private resources designated for small businesses.

Business type

To determine whether your business qualifies as small, you need to know the SBA’s specific measurement based on the North American Industrial Classification System (NAICS) code for your business type. You can find a full breakdown by industry in the Electronic Code of Federal Regulations.

SBA also provides an online Size Standards Tool that you can use to measure your company size.

SBA’s measurement tool makes it easy to find out if your business qualifies as small. Image source: Author

Businesses outside the U.S. may still qualify as an SBA small business if they have an operation in the U.S. that makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials, or labor.

Annual receipts

Many businesses are measured by their average annual receipts, which SBA defines as the average of your gross annual receipts over the past three years. Small business size based on annual receipts can run as low as $1 million for farms to $41.5 million for hospitals.

Retail, farming, construction, and service businesses are generally sized by average annual receipts, but there are many exceptions. For example, used car dealerships are measured by receipts, while new car dealerships are measured by number of employees. That’s why it’s critical to look up the threshold for your specific NAICS classification.

The SBA defines average annual receipts as “all revenue in whatever form received or accrued from whatever source, including from the sales of products or services, interest, dividends, rents, royalties, fees, or commissions, reduced by returns and allowances.” Generally, receipts equal the sum of your total income (if you’re a sole proprietor, your gross income), plus cost of goods sold as reported on your tax returns.

Receipts do not include:

● Net capital gains or losses

● Taxes, such as sales taxes, collected and remitted if included in gross or total income

● Proceeds from transactions between a concern and its affiliates

● Amounts collected for another by agents or brokers

Number of employees

Mining, manufacturing, wholesale trades, and utilities are generally measured by the number of employees. Some industries, such as transportation and information services, are split down the middle. Under information services, for example, print publishing and music production are measured by employees, while film production is measured by annual receipts.

Once again, the size range for small businesses by employee count varies widely, from as low as 100 employees for sporting goods wholesalers to 1,500 for railroads.

To determine the number of employees, SBA counts every employee as one worker, whether they are full-time, part-time, temporary, or working through a professional employee organization or leasing arrangement. The count is not based on hours worked or full-time equivalents. Volunteers are not included in the count.

Employee count is averaged over the prior year, or for new businesses, the total number of payroll periods available.

Affiliates

If your business has affiliates, their employees and receipts are included when measuring your business. Affiliates are business concerns with the power to control your business, defined as 50% ownership or more, whether they exercise that control or not. Businesses with less than 50% ownership may achieve affiliate status based on contractual arrangements or other measures.

The SBA determines affiliation in accordance with 13 CFR 121.103. You can check the SBA’s compliance guide for size and affiliation for more detailed information.

Why is the SBA definition of small business important?

Using the SBA’s tools, it’s easy to determine the small business threshold for your industry and apply it to your business. And it's well worth the effort because your small business size determines whether you qualify for a wealth of loans, grants, special programs, and contract opportunities available exclusively to small businesses.

Following are just a sampling of the many potential benefits of being small.

Loans and grants

Financing can be a major hurdle for small businesses, and the SBA provides many programs to help. SBA-guaranteed loans, available through many lenders, offer attractive interest rates and borrowing terms. In addition to guaranteed loans, the SBA’s Small Business Investment Companies program provides access to capital through private investment funds.

Special programs are also available to support research and development by small businesses. These include the Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program. These are competitive, awards-based programs that provide small businesses with a mix of grants and contract opportunities.

Beyond SBA’s offerings, there are innumerable small business grants provided by federal agencies such as the U.S. Department of Agriculture, the National Institutes of Health, and the Department of Energy, as well as state and local government authorities.

In addition to government funding, many private grants are available exclusively to small businesses. Some examples include the FedEx Small Business Grant, the Cartier Women’s Initiative, and the recently established Visa Foundation.

Government contracts

Benefits for small businesses extend far beyond loans and grants. To encourage development of the small business sector, the government sets aside 23% of federal contract dollars awarded each year for small businesses. The government further provides small business set-asides as follows:

● 5% for small disadvantaged businesses

● Three percent for Historically Underutilized Business Zone (HUBZone)-certified businesses

● Five percent for women-owned small businesses

● Three percent for service-disabled veteran-owned small businesses

You can find instructions for registering to bid on government contracts on the SBA website, as well as assistance to help you compete successfully for your share of these small business set-asides.

Development programs

In addition to help with financing and contracting opportunities, SBA provides counseling, training, and technical assistance in all aspects of small business management through small business development centers (SBDCs) throughout the U.S. and its territories.

SCORE, a nonprofit partner to SBA, also provides free advice and resources to startups and small businesses. According to SCORE, small business owners who receive three or more hours of mentoring report higher revenues and increased growth.

8 steps to help your small business thrive

When you’re looking for ways to enhance your business development efforts, make sure to leverage these programs to your advantage. Do your due diligence and make the most of your small business status by:

1. Measuring your business using the SBA’s measuring tool
2. Determining whether your firm qualifies for targeted support based on majority ownership by women, minorities, veterans, or other historically disadvantaged groups
3. Exploring financial solutions specifically designed for small businesses
4. Searching for small business grants
5. Researching federal contract opportunities and pursuing registration if desired
6. Pursuing state and local government contracting opportunities for small businesses
7. Contacting your local SBDC to explore programs and resources
8. Taking advantage of SCORE’s extensive support services
9. Supporting your fellow small businesses

The power of thinking small

Entrepreneurs may thrive on thinking big and striking out on their own, but small businesses need resources to make it over the long haul.

Take advantage of the wealth of opportunities afforded by your small size, and someday, you might just outgrow them.