How Small are Small Businesses?

How Small are Small Businesses?

Entrepreneurship continues to gain traction as a viable economic development strategy as communities focus on boosting Startup rates and supporting small businesses. Often, special opportunities, like government contracts or loan programs, are available specifically to small businesses.

So, what is a small business and how small does a small business have to be to keep that title?

There is no one answer to the definition of a small business.  According to the Small Business Administration (SBA), a small business is a for-profit organization operating in the U.S. that is independently owned and operated. The business cannot be dominant in its field on a national basis and it must meet within certain criteria regarding its size. However, a small business can have any legal form (sole proprietorship, corporation, etc.).

Typically, small business size is defined in one of two ways: by number of employees or by revenue. The SBA uses average employment or average annual receipts to define small businesses for Federal Government programs. These numbers vary by industry, however, and the SBA categorizes this information by NAICS code.

For example, within the agricultural industry, the SBA determines size by receipts. An apple orchard would need to have $750,000 in annual receipts or less to qualify as a small business, whereas a chicken egg production business could have up to $14 million in receipts while retaining its small business status. Television broadcasting companies, on the other hand, have a higher cap on annual receipts of $35 million.

In some industries, employment is the determining factor for the SBA. Oil production companies need to remain under 500 employees to be considered a small business, for example.

The SBA considers industry structure, small business share in federal contacts, technological change, competing products in other industries, and several other factors when determining or revising a business size standard.

These size standards are used by the SBA to determine awards of government contracts.

Other opportunities, such as small business loans, have similar guidelines. Economic gardening programs, such as the Kansas Economic Gardening Network, might use a combination of factors to determine a business’s size for the purpose of receiving assistance. The Kansas Economic Gardening Network permits businesses that have moved out of Startup stage but not beyond the small business size to apply for economic gardening assistance. They consider businesses with fewer than 100 employees and $50 million in annual revenue to meet their qualifications for a second-stage small business.

Other countries use their own size standards to define small businesses. For example, most countries in the European Union consider businesses with 50 employees or fewer to be “small businesses”.  Australia defines a small business as one with 15 employees or fewer. Both numbers are quite a contrast to the average standard of 500 employees or fewer in the United States.

As entrepreneurship continues to influence public policy and economic growth, a more precise definition of a small business might be forthcoming. Some, such as Forbes’ magazine contributor Steve Cooper, believe that refining the definition of a small business to restrict access to business growth opportunities to smaller companies will encourage economic growth.

For now, though, 99.7% of American businesses remain “small businesses” by the SBA’s definition.

Content contributed by Anne Dewvall of Network Kansas. Network Kansas is a proud affiliate of U.S.SourceLink, America’s largest resource network for entrepreneurs. 

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