Whether the U.S. Small Business Administration (SBA) considers your company a small business impacts your eligibility for various federal loans and other business tools. Without this designation, you won’t qualify for SBA loans, certain government contracts, grants and other government-backed financing tools.
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Generally speaking, a small business is one with 500 or fewer employees. However, the SBA also defines small businesses differently based on the number of employees a company has or their average annual receipts, which varies by industry. What’s more, there are several footnotes to the SBA size table—for example, the size of a financial institution is designated based on the value of its assets.
Employee calculations. The SBA calculates a business’s employees by taking the company’s average number of employees for each pay period over the business’s latest 24 calendar months. An employee is anyone who’s on the payroll—even if they work part-time or have temporary status.
Annual receipt calculations. Annual receipts are a company’s gross income minus the cost of goods sold, but calculations ultimately depend on their purpose. For example, annual receipts for purposes of federal contracting are based on an average of the business’s latest five full fiscal years. For SBA loans, calculations may be based on three or five years of average receipts. Companies that haven’t been in business for five years can multiply their average weekly revenues by 52 to calculate average annual receipts.
Note: If a business has affiliate businesses that are economically dependent on each other, it must consider the average annual receipts or the number of employees for all of these other businesses when calculating size.
In addition to business size, the SBA also considers several other factors when determining if a company qualifies as a small business, including whether the business is:
Based in the U.S.
Operates primarily in the U.S.
Independently owned and operated
A minority company in its larger industry
Definition of a Small Business by Industry
For purposes of SBA size designation, industries are defined by the North American Industry Classification System (NAICS) codes. This six-digit code determines the NAICS size standard that applies to businesses—whether based on number of employees or average annual receipts.
Here are the SBA’s size standards for some major industries:
Offices of lawyers. $15.5 million
Offices of Certified Public Accountants. $26.5 million
Advertising agencies. $25.5 million
Offices of real estate agents and brokers. $15 million
Bed and breakfast inns. $9 million
Full-service restaurants. $11.5 million
General automotive repair. $9 million
Pet care services (except veterinary). $9 million
Independent artists, writers and performers. $9 million
New car dealers. 200 employees
Used car dealers. $30.5 million
New housing for-sale builders. $45 million
Land subdivision. $34 million
Wheat farming. $2.25 million
Logging. 500 employees
Sawmills. 500 employees
Natural gas extraction. 1,250 employees
Solar electric power generation. 250 employees
Electric power distribution. 1,000
These aren’t all of the industries defined by the SBA, so check out the SBA’s complete Table of Small Business Size Standards for a complete list. Because the standard is industry-specific, some companies that seem like large organizations are still designated small businesses by the SBA.
For example, a company engaged in the pipeline transportation of crude oil with 1,500 or fewer employees meets the SBA’s size requirements for a small business. On the other hand, a fuel dealer can only have a maximum of 100 employees to be considered a small business.
Why Does the SBA’s Size Definition Matter?
The goal of the SBA is to protect and promote the success of small businesses in the U.S. By defining what constitutes a small business in each industry, the SBA identifies which businesses should benefit from the services and financing opportunities the SBA provides to help small businesses thrive.
For example, being a small business means a company is eligible for SBA-backed business loans in addition to other small business loans. The designation can also help small businesses win government contracts and gain access to tools that make it easier to compete against larger businesses in the economy as a whole—not just at the community level.
Being designated a small business can also help socially and economically disadvantaged business owners succeed. The SBA provides entrepreneurs with counseling and workshops and helps them connect with federal buyers.
4 Advantages of Being Classified as a Small Business
Being classified as a small business by the SBA opens the door to a range of financial benefits and tools that aren’t available to larger companies. In addition to being eligible for SBA and United States Department of Agriculture (USDA) loans, small businesses are more likely to get government contracts and grants. Eligible business owners can also take advantage of additional tax incentives and business resources that are reserved for small businesses.
These are some of the main advantages of being classified as a small business:
1. Government-backed Loans
A business must meet the requirements for a small business to qualify for SBA loans and certain USDA loan programs. SBA loans, including the flagship 7(a) loan program, popular 504 loans, CAPLines and Microloans, are only available to small businesses. Likewise, loans that are part of the USDA’s OneRD Guarantee Loan Initiative are reserved for rural small businesses, agricultural producers and tribes.
2. Government Contracts and Grants
When awarding contracts, the U.S. government often favors businesses that qualify as small businesses. Many government contracting programs even set aside a certain number of contracts for small businesses. According to the SBA, 23% of all prime government contract dollars are awarded to small businesses.
Likewise, several federal grant programs are reserved for small businesses or are more likely to be awarded to small businesses. Grants like the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs are intended to help small firms conduct scientific research that can contribute to federal research and development objectives.
Other programs are aimed at encouraging entrepreneurs. For example, the 7(j) Management and Technical Assistance Program provides management and technical assistance and guidance to eligible small businesses.
3. Tax Incentives
Small business owners can take advantage of several tax incentives, including tax credits and standard business deductions. For example, the Small Business Health Care Tax Credit lets eligible small businesses save as much as 50% on health insurance premiums. State and local tax incentives may also be available for small businesses—though eligibility requirements may differ from those the SBA imposes.
4. Business Resources
In addition to financial benefits, companies that meet the SBA’s definition of a small business can take advantage of several resources to help them compete against larger organizations. This includes access to one of more than 75 SBA district offices and more than 900 small business development centers that offer local business assistance. Small business owners can also benefit from the SBA Office of Advocacy, certification programs, business plan guidance and other entrepreneurial resources.
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