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What qualifies as a small business?

Posted by Shivali Anand

November 12, 2021    |     4-minute read (665 words)

You've launched a company and are planning for expansion, so it seems natural to assume you’ve got a small business on your hands. But not every entrepreneurial venture can be classified as a small business. A general rule of thumb is a small business is one with 500 or fewer employees, but the federal government’s definition is more complex.

The U.S. Small Business Administration’s mission is to promote small businesses and protect them against large market competitors. Qualifying as a small business under the agency’s definition opens valuable opportunities, such as SBA-guaranteed business loans, business catastrophe loans, federal government-awarded contracts and free business counseling.

But what criteria does the SBA use to define small business? Below you’ll find out how to meet its requirements.

The advantages of qualifying as a small business

Entrepreneurs are often eager to apply for SBA awards, but before seeking assistance, you must first register with the System for Award Management to self-certify your firm as "small.” The government uses this database to guarantee that the eligible small businesses garner at least 23% of all federal contracts each year.

The government also aims to award a set amount of federal prime contracting dollars to small enterprises that can demonstrate that they satisfy the following socioeconomic criteria with certification.

  • Women-owned small businesses – 5%
  • Small disadvantaged businesses – 5%
  • Service-disabled veteran-owned small businesses – 3%
  • Small businesses in HUB Zones – 3%
Because some large contracts can’t be awarded directly to small businesses, the government also creates a small company subcontracting program as part of some big contracts. This program instructs the prime contractor to give small firms a subcontract.

To participate in federal government contracting, businesses must follow all laws and Federal Acquisition Regulations.

Quantifying your small business

To participate in federal contracting programs, your company must fulfill SBA size requirements. A size standard is the maximum size that a company and its affiliates can be to qualify for small business classification. 

Most manufacturing companies with 500 or fewer employees and non-manufacturing companies with average annual receipts of less than $7.5 million qualify as small businesses. But there are some industry-specific exceptions. To determine whether your company qualifies as a small business, you can refer to the Size Standards Tool or check the SBA's Table of Size Standards, using your industry code.

To determine your industry code, visit The North American Industry Classification System code list. This system categorizes businesses based on the products or services they provide. If a company sells a variety of goods and services, it might have multiple NAICS codes. Although the NAICS is a self-assignment system, businesses can seek assistance from the U.S. Census Bureau to determine the appropriate code.

The NAICS is revised regularly, and the SBA updates its definitions on a regular basis. The SBA's revisions take multiple factors into consideration, including inflation. That means although you outgrew small business categorization in previous years, an SBA update could qualify you as a small business again.

The size criteria vary by industry and are based on the average number of workers over the last 12 months or the average yearly receipts. Tally your business’s annual receipts and employee count, then assess whether your business meets the size standards for the selected NAICS codes.

Final caveats

In addition to size, the SBA considers these following factors to decide whether a company qualifies as a small business.

  • The company has a place of business in the U.S.
  • The company is based in the U.S. or contributes significantly to the U.S. economy by paying taxes or using American products, resources or labor.
  • It is a for-profit organization.
  • It is independently owned and operated, and it is not a national leader in its sector.
As an additional resource, you may wish to consult the SBA’s comprehensive table of size standards for every industry and subindustry, along with definitions for a small business in that industry and its NAICS code. 

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