What do you think of when you hear the term small business? Some people think sole proprietorship. Other people define the term by the number of employees. However you define it, there are 30.2 million small businesses in the USA. Still, to find a definition of small business that works, we’ll need to delve deeper.
How Do You Define a Small Business?
The definition of a small business depends on a few factors.
The Small Business Administration (SBA) has a table of size standards that helps. It varies by industry but takes into account the number of employees and annual receipts.
A small business could set up its business structure as a partnership, sole proprietorship or privately owned corporation. It has less revenue than larger corporations or bigger businesses.
The general rule is a company with less than 500 employees fits the bill. That means a small business definition can include a small corner store that’s owned and operated by one person.
The same goes for a local factory producing widgets or a businesses working in the health care or other industries. As long as they employ less than 500 people, they are small businesses.
However, this may be too confining a definition and with the huge differences between industries, an oversimplified one.
Definition of Small Business by Industry
Understanding how the SBA defines a small business doesn’t need to be confusing. These industry examples will help you understand what the SBA considers a small business in a variety of industries.
- Retail Bakeries: There’s no SBA listing for the average annual receipts for small business here. However, you’re allowed up to 500 employees while still being classified as small.
- Drywall and Insulation Contractors: You can stay small with this business and still make good money. Dry wall and insulation contractors can make up to $16.5 million in average annual receipts and still be considered small.
- Logging: To qualify as a small business, there needs to be under 500 employees. However logging companies can make up to $12 million dollars and still be classified as small.
- Hardware Manufacturing: There are no average annual income numbers listed by the SBA. However, a hardware manufacturer can employee up to 750 people and still be considered small. Remember, where there are no average annual earnings listed, the number of employees is used to define a small business’s status.
- Beef Cattle Farming: You can make up to $1 million in average annual receipts and still be qualified as a small business here.
- Residential Remodelers: The amount of money you can make here while still being considered a small business is considerably higher. You can make up to $39.5 million in this industry. These small businesses thrive when new home sales go down.
- Tortilla Manufacturing: There are many different industries and categories listed by the SBA under the definitions for small business. The number of employees you can have to qualify is high for this industry at 1,250.
- Machine Shops: This is a common small business. The SBA can help you open one of these with a loan. The requirements for employees is higher than some of the other small businesses listed here. You can employee up to 500 and still be considered small in this space.
- Roofing Contractors: This is another small business with high numbers. The average annual receipts here can go as high as $16.5 million. There are quite a few of these home related industries listed.
- Framing Contractors: This is just such an example. The SBA definition of small business here has a $16.5 million ceiling too.
Comparative Criteria for Small Businesses by Industry
For a clearer understanding of what constitutes a small business within various industries, the table below provides a summary. It showcases the average annual receipts and the maximum number of employees allowed for each industry to still be classified as a “small business” by the SBA:
| Industry | Average Annual Receipts | Maximum Employees |
|---|---|---|
| Retail Bakeries | – | Up to 500 |
| Drywall and Insulation Contractors | Up to $16.5 million | – |
| Logging | Up to $12 million | Up to 500 |
| Hardware Manufacturing | – | Up to 500 |
| Beef Cattle Farming (except Feedlots) | Up to $1 million | – |
| Residential Remodelers | Up to $39.5 million | – |
| Tortilla Manufacturing | – | Up to 1,250 |
| Machine Shops | Up to $35 million | Up to 500 |
| Roofing Contractors | Up to $16.5 million | – |
| Framing Contractors | Up to $16.5 million | – |
There are a few other small business administration (SBA) terms you should be familiar with to understand how the agency defines a small business.
Affiliates
Affiliates play a unique and intricate role in the business ecosystem. At its core, an affiliate refers to companies that exert control or significant influence over other enterprises by owning a substantial stake in them.
It’s not always about majority ownership—sometimes, owning less than half of another company’s shares can provide enough sway to shape decisions and policies.
Imagine Company A holding a 40% stake in Company B. Even without a majority share, Company A might have a strong voice in Company B’s board meetings or strategic planning sessions. This is because their significant shareholding means their interests cannot be easily overlooked.
But influence isn’t always about driving decisions. Sometimes, it’s about preventing them. Negative control is a scenario where an affiliate blocks or obstructs decisions that might otherwise favor another company.
Affiliate relationships are especially scrutinized by organizations like the Small Business Administration (SBA) in the U.S.
For instance, while Company A might individually meet the SBA’s definition of a ‘small business,’ the combined metrics of all its affiliates could push it over the threshold, disqualifying it from certain benefits.
Annual Receipts
Simply put, a company’s annual receipts provide a snapshot of its revenue health. The SBA often computes this as an average across a span of three to five years to get a consistent view of a business’s performance.
These figures play a pivotal role in the classification of enterprises. The limits for what constitutes a small business, in terms of annual receipts, can vary across industries. For instance, a tech startup and a local bakery might have different financial thresholds to be classified as a ‘small business.’
Employee Statistics
On the surface, employee statistics might seem like straightforward data, indicating the number of full-time staff a company employs. But when these figures are averaged across payment cycles and juxtaposed against industry benchmarks, they become key indicators of a company’s scale.
For the SBA, these numbers are critical. They often set specific employee thresholds for different sectors. A manufacturing unit, for example, might be considered a small business if it employs fewer than 500 people, while a publishing house might have a lower limit.
In essence, understanding the dynamics of affiliates, annual receipts, and employee statistics is crucial for businesses, especially those aiming to qualify for specific designations or benefits. Being aware of these facets ensures companies can strategize better and leverage opportunities effectively.
What is the IRS Definition of a Small Business?
The IRS defines small businesses differently. The agency starts by defining what it considers to be businesses in general. According to the IRS, businesses of any kind are an activity carried out to make a profit.
Different situations determine whether they look at these as a trade or business for tax purposes. You don’t need to make a profit to be on their radar. However, you need to show that you are making an ongoing effort to make it successful.
Here’s another important point about small businesses according to the IRS. You don’t need to work at your business full time. The IRS wants to know if you’ve got a part time business — even if you’ve got a full-time job and are running your business on the side.
The IRS doesn’t use standard sizes to classify businesses either. Here’s a few things you need to know about their tax system — and how this takes the place of standard sizes. Remember, every business needs to pay taxes. It doesn’t matter what business you’re in.
The business structure you pick affects how you pay your taxes. There are several of these to choose from.
Sole Proprietorship
Sole proprietorship is the most basic form of business organization, where a single individual is in charge of all the business aspects— from decision-making to bearing the financial risks.
Given its nature, it’s no surprise that many self-employed professionals opt for this structure. It doesn’t require complex registration processes, and the owner has full control.
However, it’s worth noting that the same person also bears all the business liabilities, making them personally responsible for any debts or legal actions against the business.
Here’s a list of some of the tax forms you’d need to fill out. If you fit into this category, you’ll need to drill down a little further. That means deciding whether you’re an independent contractor or in business by yourself. Here’s some more information that can help.
Partnerships
When two or more individuals decide to join forces in a business endeavor, a partnership is born. Recognized by the IRS, this structure allows multiple parties to share the profits, losses, responsibilities, and risks of the business.
An interesting aspect here is the provision for married couples. The IRS allows them to designate a jointly owned and operated business as a partnership, provided it isn’t a corporation.
This structure offers flexibility in profit distribution and decision-making but also necessitates shared responsibility for liabilities.
A Limited Liability Company (LLC)
LLCs are unique business structures that combine elements of both partnerships and corporations. One of their standout features is the limited liability protection they offer to their owners, termed as “members.”
This means that members are typically not personally liable for the company’s debts or legal liabilities.
Additionally, while LLC regulations vary by state, they generally provide flexibility in management and profit distribution. It’s crucial for businesses to check their state’s specific requirements when considering forming an LLC.
Corporations
While the term “corporation” might evoke images of sprawling conglomerates, the IRS classifies certain corporations under the small business umbrella. Two primary types are C corporations and S corporations. Each has its own tax implications:
- C Corporation: This is a legal entity distinct from its owners, offering them limited liability protection. From a taxation perspective, C corporations face double taxation. The corporation pays taxes on its profits, and when these profits are distributed to shareholders as dividends, they are taxed again at the individual’s tax rate.
- S Corporation: Designed to bypass the double taxation challenge, an S corporation doesn’t pay corporate income tax. Instead, its income, deductions, and credits “pass through” to shareholders, who report these on their individual tax returns. This can offer potential tax savings but comes with certain eligibility criteria and restrictions.
How Much Revenue Does a Small Business Make?
According to the Small Business Administration, small businesses can make anywhere between $1 million and $40 million — or a bit more in some cases — depending on the industries in which they operate and still be considered a small business. However, the reality may be quite a bit different.
For example, according to Fundera, the average sole proprietorship with no employees might bring in only $47,000 a year. While the average small business owner might clear $72,000 a year. That includes small business owners who might have a few employees working for them as well.
Another survey suggests 22% of small businesses make under $10,000 a year while just 7% making over $1 million.
Conclusion
From average annual receipts to number of employees, the SBA defines what qualifies as a small business. The small business community may have their own definitions too.
However SBA size standards clearly have a huge impact especially when it comes to qualifying for government contracts set aside for small businesses.
Whether you run a soy bean farm or a leather and hide tanning business, the definition small business officials use to define those that fit into the small businesses definition and those that do not can seem confusing.
These size standards affect more than just who gets lucrative government contracts, however. From the health care industry to retail and e-commerce, they also define how we think about small businesses and how we understand their importance to our economy.
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This article, “What is the Definition of a Small Business? The Answer May Surprise You” was first published on Small Business Trends