Simone Lawson
The Small Business Administration (SBA) defines a small business according to three factors: company type, average annual revenue, and number of employees. However, there is no one-size-fits-all definition of a small business, as the threshold varies by industry, revenue, and employment. For example, a small business in the finance and insurance industry can have up to 1,500 employees, while a small business in the management of companies and enterprises sector can have a maximum of $40 million in average annual receipts. Small businesses are important for economic growth, and their classification carries benefits such as eligibility for SBA loans, grants, and
| Characteristics | Values |
|---|---|
| Number of employees | Fewer than 25% of the workforce or fewer than 500 people. However, this number can vary depending on the industry. |
| Annual revenue | $1 million to over $40 million. However, this can vary depending on the industry. |
| Annual receipts | Total income (gross income) plus the cost of goods sold. |
| Employee calculation | Average number of people employed for each pay period over the business's latest 24 calendar months. |
| Affiliates | Employees or receipts of all affiliates must be included when determining the size of a business. |
| Location | The SBA defines small businesses based on their location. |
| Financial motivation | The SBA defines small businesses based on their financial motivation. |
| Structure | The SBA defines small businesses based on their structure. |
| Ownership identity | The SBA defines small businesses based on their ownership identity. |
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Annual receipts
The U.S. Small Business Administration (SBA) defines a small business according to three factors: company type, average annual revenues, and number of employees. The SBA's size standards define the largest size a business can be to participate in government contracting programs and compete for contracts reserved for small businesses.
Size standards vary by industry and are based on either the number of employees or the amount of annual receipts the business has. Annual receipts refer to the "total income" or "gross income" plus the "cost of goods sold." These numbers can be found on the business's IRS tax return forms. For federal contracting purposes, receipts are averaged over the business's latest five fiscal years. If a business hasn't been operating for five years, its average weekly revenue is multiplied by 52 to determine its average annual receipts.
The SBA offers a free size standards tool that allows businesses to determine if they meet the criteria for a small business designation. Businesses enter their NAICS code and their average annual receipts or number of employees, depending on their industry's standard.
While the SBA definition is the standard for federal purposes, small business definitions can vary significantly based on location and context. Many states have their own definitions of what constitutes a small business, often with thresholds that differ from federal standards. For example, some states set lower employee counts (often 50 to 100 employees) for small business designation. Revenue thresholds also frequently vary from SBA standards, typically lower.
- Finance and insurance: $13 million to $41.5 million
- Real estate, rental, and leasing: $8 million to $41.5 million
- Professional, scientific, and technical services: $8 million to $41.5 million, or no more than 150 to 1,500 employees, depending on the subsector
- Management of companies and enterprises: $34 million for offices of bank holding companies, and $40 million for offices of other holding companies
- Administrative and support, waste management, and remediation services: $7.5 million to $41.5 million, depending on the subsector
- Most non-manufacturing businesses: under $7.5 million in average annual receipts
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Employee count
The SBA's standards for small businesses are based on three factors: company type, average annual revenues, and number of employees. The SBA offers a free size standards tool that business owners can use to determine if their business meets the criteria. This tool takes into account the business's NAICS code and average annual receipts or number of employees, depending on the industry's standard.
The SBA's Table of Size Standards provides definitions for North American Industry Classification System (NAICS) codes, which vary by industry, revenue, and employment. For example, a small business in the Asphalt Shingle and Coating Material Manufacturing industry is defined as having fewer than 750 employees. In the Finance and Insurance industry, a small business is defined as having no more than 1,500 employees for direct property and casualty insurance carriers, while a small business in the Professional, Scientific, and Technical Services industry can have up to 1,500 employees, depending on the subsector.
In addition to the SBA's definition, many states have their own definitions of what constitutes a small business, often with lower employee count thresholds than federal standards. These definitions are important for businesses to be aware of, as qualifying as a small business can come with benefits such as eligibility for SBA loans, grants, and programs, as well as access to certain tax benefits.
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Location and context
The definition of a "small business" varies depending on location and context. While the US Small Business Administration (SBA) provides a standard definition for federal purposes, many states have their own definitions, which often have lower thresholds than federal standards. For example, some states set lower employee counts, such as 50 to 100 employees, for small business designation. Revenue thresholds also frequently differ from SBA standards, typically being lower.
The SBA defines a small business as one that employs fewer than 500 people, but this number can vary depending on the industry. Some industries are not defined as "small" based on their number of employees, but rather the annual revenue they generate. The SBA also considers factors such as location, financial motivation, structure, and ownership identity when determining whether to classify a company as a small business.
The SBA's Table of Size Standards provides definitions for the North American Industry Classification System (NAICS) codes, which vary by industry, revenue, and employment. According to the SBA, a small business is defined by firm revenue (ranging from $1 million to over $40 million) and employment (from 100 to over 1,500 employees). For example, in the finance and insurance industry, a small business is defined as having no more than 1,500 employees for direct property and casualty insurance carriers, and a maximum of $13 million to $41.5 million in average annual receipts.
In addition to the SBA's definitions, other sources provide different perspectives on what constitutes a small business. For instance, if the definition of a small business aims to reflect businesses that employ fewer than 25% of the workforce, an establishment with fewer than 20 employees might be considered small. This perspective considers the sales, shipments, or revenue of a business, rather than solely focusing on the number of employees.
The context of the industry is also important when defining a small business. For example, in the Ambulatory Health Care Services industry, establishments with less than $5 million in revenue might be considered small, as they account for a smaller portion of the industry's revenue. Similarly, in the Limited-Service Restaurant industry, firms with fewer than 250 employees may be considered small, as they account for a larger share of the industry's total sales.
Overall, the definition of a "small business" is relative and depends on various factors such as location, industry, revenue, and employment. It is important for businesses to understand the specific definitions and requirements of their respective locations and industries to qualify for the benefits associated with small businesses, such as government contracts, loans, and research grants.
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Company type
The SBA's small business standards vary across industries. For instance, manufacturing companies with 500 or fewer employees and non-manufacturing businesses with average annual receipts under $7.5 million generally qualify as small businesses. However, there are exceptions within industries. For example, within the finance and insurance sector, direct property and casualty insurance carriers are considered small businesses if they have no more than 1,500 employees and up to $13 million to $41.5 million in average annual receipts.
The SBA also considers other factors such as location, financial motivation, structure, and ownership identity when determining whether a company qualifies as a small business. For instance, businesses outside the US may still be considered small if they have a US operation that significantly contributes to the US economy through taxes, use of American products, or labour.
The SBA provides a free size standards tool that allows businesses to determine if they meet the small business criteria. This tool considers the business's North American Industry Classification System (NAICS) code, average annual receipts, and number of employees.
Being classified as a small business has its benefits. The SBA offers various support programs, grants, and loans for small businesses. Small businesses also have access to government contracts, which can help them compete with larger corporations.
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Annual revenue
The U.S. Small Business Administration (SBA) defines a small business according to three factors: company type, average annual revenue, and number of employees. The SBA's size standards define the largest size a business can be to participate in government contracting programs and compete for contracts reserved for small businesses. These standards vary by industry and are based on either the number of employees or the amount of annual receipts (total income or gross income plus the cost of goods sold).
The SBA offers a free size standards tool that allows businesses to determine if they meet the criteria for a small business designation. The SBA's Table of Size Standards provides definitions for North American Industry Classification System (NAICS) codes, which vary by industry, revenue, and employment. According to the SBA, a small business typically employs fewer than 500 people, although this number can vary depending on the industry. Some industries are considered small not based on their number of employees but on the annual revenue they generate.
For example, in the Ambulatory Health Care Services industry (NAICS 621), establishments with more than $5 million in annual revenue accounted for 59.3% of the industry's revenue in 2017. Therefore, establishments with less than $5 million in revenue might be considered small businesses in this industry. In the Computer and Electronic Product Manufacturing industry (NAICS 3341), 4,965 establishments with fewer than five employees accounted for only 1.2% ($3.6 billion) of the industry's total revenue in 2017. In contrast, 639 establishments with more than 250 employees accounted for 67.7% of the industry's shipments.
The SBA also considers location, financial motivation, structure, and ownership identity when determining whether to classify a company as a small business. Businesses outside the U.S. may still be considered small if they have a U.S. operation that significantly contributes to the U.S. economy through tax payments or the use of American products, materials, or labor. Many states have their own definitions of small businesses, with thresholds that differ from federal standards. Revenue thresholds, in particular, often vary from SBA standards and are typically lower.
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Frequently asked questions
SBA stands for the Small Business Administration, a federal agency that regulates and provides support to small businesses.
The SBA defines a small business as one that employs fewer than 500 people. However, this number can vary depending on the industry. Some industries are defined as “small” based on their annual revenue rather than the number of employees.
Being classified as a small business comes with several benefits, including eligibility for SBA loans, grants, and programs, access to certain tax benefits, and the ability to market as a small, independent business. Small businesses can also compete for government contracts set aside for small businesses.
The SBA offers a free size standards tool that can help you determine if your business meets the criteria. You can enter your business's NAICS code, average annual receipts, and number of employees to see if your business qualifies as a small business.
