Know about Small Company Criteria | How to qualify as a small business

“How to Determine if You Qualify as a Small Business”

You can call your company a small business, but you could lose out on some opportunities if you don’t meet the SBA’s definition. The SBA’s standards for small businesses are based on your company type, average annual revenues, and number of employees. Is your business tiny? Read on to find out.

How to Determine if You Own a Small Business

To be classified as a small business, a company must meet the size standard for its industry. This standard represents a business’s maximum size to maintain its “small business” designation.

The U.S. Census Bureau provides a list of industry codes to help businesses identify their size classification. The Small Business Administration (SBA) also publishes detailed size standards outlining the maximum requirements for firms to remain categorized as small in each industry sector and subsector.

“The definition of ‘small business’ depends on the industry code a company falls under,” explains Molly Gimmel, CEO of Design to Delivery. “For example, my company’s primary code is 541611. In that industry, a small business is defined as one with average revenues of less than $16.5 million over the past three completed fiscal years.”

While size standards vary across industries, they are typically based on the number of employees or average annual revenue. The SBA’s current business size standards provide specific thresholds for each sector.

• Agriculture, forestry, fishing, and hunting: Between $2 million and $30 million in average annual receipts, depending on your subsector.
• Mining, quarrying, and oil and gas extraction: No more than 250 to 1,500 employees, depending on your subsector. Four sectors have annual revenue raher than employee limits, ranging from $18 million to $41.5 million.
• Utilities: No more than 250 to 1,000 employees, depending on your sector. There are three sectors with annual revenue limits instead, ranging from $26.5 million to $36 million.
• Construction: Between $16.5 and $39.5 million in average annual receipts.
• Manufacturing: No more than 500 to 1,500 employees, depending on your subsector.
• Wholesale trade: No more than 100 to 250 employees, depending on your subsector.
• Retail trade: No more than $8 to $41.5 million in average annual receipts, depending on your subsector. Other subsectors have defined employee maximums from 100 to 200.
• Transportation and warehousing: No more than 500 to 1,500 employees, depending on your subsector. Some subsectors have maximum average annual receipt limits ranging from $8 million to $41.5 million.
• Information: No more than 250 to 1,500 employees, depending on your subsector. The average annual receipts range from $9.5 million to $41.5 million.
• Finance and insurance: No more than 1,500 employees are employed in direct property and casualty insurance carriers, and there is a maximum of $13 million to $41.5 million in average annual receipts. Instead, Certain financial institutions qualify as small businesses with no more than $750 million in assets.
• Real estate, rental, and leasing: No more than $8 million to $41.5 million in average annual receipts.
• Professional, scientific, and technical services: No more than $8 million to $41.5 million in average annual receipts or 150 to 1,500 employees, depending on your subsector.
• Management of companies and enterprises: No more than $34 million in average annual receipts for offices of bank holding companies. Offices of other holding companies must earn no more than $40 million in average annual receipts.
• Administrative and support, waste management, and remediation services: No more than $7.5 million to $41.5 million in average annual receipts, depending on your subsector.
• Educational services: No more than $8 million to $41.5 million in average annual receipts, depending on your subsector.
• Healthcare and social assistance: No more than $7.5 million to $38.5 million in average annual receipts, depending on your subsector.
• Arts, entertainment, and recreation: No more than $8 million to $41.5 million in average annual receipts, depending on your subsector.
• Accommodation and food services: No more than $8 million to $41.5 million in average annual receipts, depending on your subsector.
• Other services: No more than $7 million to $41.5 million in average annual receipts, depending on your subsector.

Benefits of being classified as a small business

Business size classification is significant. Recognizing that a small business offers various benefits, determining if your business qualifies is essential. Here are some advantages small companies can access.

• Loans: Rather than lending money directly to businesses, the SBA works with lenders and essentially acts as a co-signer for small businesses seeking loans. This gives lenders a stronger guarantee that they’ll be paid back, providing small businesses access to better rates than they might receive.
• Government contracts: The SBA offers several government contracts for small businesses, which can help them compete with larger corporations in their industry.
• Research grants: Small businesses are eligible for government grants for SBIR (Small Business and Innovation Research). These grants encourage small business owners to explore technology and commercialization opportunities.

In addition to these tangible benefits, small businesses tend to be more flexible and adaptable than large companies, allowing them to pivot as needed amidst changing economic conditions. Moreover, small companies tend to be innovative laboratories experimenting with new ideas – some of which may disrupt entire industries.

How Do Industry Codes and Definitions Work?

The SBA defines business categories based on the North American Industry Classification System (NAICS), which various federal agencies developed. This system is used for statistical analysis and to classify businesses for revenue, taxation, and other regulatory requirements.

What are NAICS codes?

The NAICS divides businesses into industries and further into subclassifications and even further subclassifications. For example, sectors 44 and 45 are retail trade businesses. Furniture and home furnishings stores are a subclass of sector 44 and are denoted by codes that start with 442. That subclass is further divided into 4421 (furniture stores) and 4422 (home furnishings stores).

But even those classifications are further divided. Under furniture stores, for example, you might see the following codes:

• 442210 – Floor covering stores
• 442291 – Window treatment stores
• 442299 – All other home furnishings stores

From just this snippet of codes taken from the 2022 NAICS, you can see how complicated it can be to determine which code applies to your business – and if your company operates multiple lines of business, you may need to select more than one code.

How Do NAICS Codes Help Determine If You’re a Small Business?

The SBA provides a comprehensive table of small business size standards, listing every NAICS code and the criteria defining a small business within each industry. Depending on the industry, these standards are based on either annual revenue or the number of employees.

For instance, businesses under NAICS code 424110 (printing and writing paper merchant wholesalers) are classified as small if they have 225 or fewer employees. In contrast, fish and seafood merchant wholesalers (424460) lose their minor business status once they exceed 100 full-time employees.

At times, the standards can appear inconsistent or confusing. For example, new car dealers (441110) are small businesses with 200 or fewer full-time employees. However, used car dealers (441120) are classified differently—they qualify as small businesses if their average annual revenue is $27 million or less, regardless of employee count.

Can You Requalify as a Small Business?

The SBA periodically updates its size standards to account for factors like inflation, recognizing that $1 million in revenue 15 years ago is not the same as $1 million today. If your business previously outgrew the small business classification, it’s worth reviewing the latest SBA definitions for your NAICS code whenever updates are released. You may discover that your business qualifies as small again, even if your revenue has remained stable or experienced modest growth.

Keeping Track of Your Business Size

Even if your business has expanded over time, it might still meet the SBA’s criteria for a small business. This would allow you to access government benefits unavailable to larger companies. To ensure your status is accurate and take advantage of available resources, review the SBA standards and Census Bureau NAICS codes regularly—ideally every few months. Here’s a quick guide to determine if you qualify as a small business, followed by a few FAQs to clarify common concerns:

How to Determine if You Qualify as a Small Business

Understand the Small Business Administration (SBA) Guidelines

• The SBA defines small businesses based on industry, annual revenue, and number of employees.
• These limits vary by sector and are detailed in the SBA’s Size Standards Tool.
• For example, a manufacturing company may qualify with up to 500 employees, while a service business might be eligible with annual revenue under $8 million.

Consider Other Defining Factors

• A small business is independently owned and operated. It is not dominant in its field or part of a larger corporation.
• Your business should serve a local or regional market rather than a national or global one.

Review Your Tax Classification

If you file taxes as a sole proprietor, partnership, LLC, or S corporation, this is an indicator you are considered a small business for legal and tax purposes.

FAQs