SmallBiz Vote

Confused by small business definitions?

A small business is bigger than a breadbox

It's little wonder there's so much confusion about just what exactly a small business is. There are many definitions, and even within the federal government, there are varying standards.

The U.S. Census tracks small businesses with under 500 employees. According to its data, 78 percent are actually self-employed individuals, and more than 95 percent of small businesses have 10 or fewer workers. Only 0.3 percent fall into the 100 or greater category.

For research purposes, the U.S. Small Business Administration generally considers firms with fewer than 500 employees to be small businesses. But to identify candidates for its programs, the SBA defines a small business, depending on industry, based on sales or number of employees. Sales thresholds range from under $1 million to $35.5 million, with $7 million the most common benchmark. Employee number thresholds range from 50 to 1,500 employees, with 500 employees the most common benchmark.

Among the various exceptions to SBA's 500 employees or $7 million in sales threshold:

  • General building and heavy construction contractors: up to $33.5 million in average annual receipts.
  • Special trade construction contractors: up to $14 million.
  • Dredging: up to $20 million.
  • Manufacturing: up to 500 employees for most, but up to 750 employees, 1,000 employees, or 1,500 employees for others.
  • Grocery stores, department stores, motor vehicle dealers, and electrical appliance dealers have standards over $7 million in average annual receipts, but none higher than $29 million.
  • Computer programming, data processing, and systems design businesses up to $25 million.
  • Engineering and architectural services and a few other service industries have different standards, with highest annual receipts standard for any at $35.5 million.

Independent small business organizations tend to adopt the US SBA definition of 500 employees. The Small Business Advocate considers a small business any company with 500 or fewer employees. And National Small Business Association spokewoman Molly Brogan, told Yahoo! Small Business Advisor, "We adhere to the definition the Small Business Administration uses: anyone with fewer than 500 employees. That said, the majority of our members are businesses with between 7 and 10 or 11 employees."

The National Federation of Independent Businesses opens its membership to privately held companies that are owned by individuals or families, but acknowledges that 90 percent of its members have fewer than 20 employees and 70 percent have fewer than 10.

Here at Yahoo! Small Business Advisor, our surveys poll business owners with up to 100 employees.

For its purposes, the IRS ignores number of employees. A report published in August 2011 by the US Office of Tax Analysis stated:

Although "small business owners" are often the subject of tax policy debate, a consensus does not exist regarding the specific attributes that distinguish small businesses from other firms. Previously, the Office of Tax Analysis had counted a small business owner as any individual who receives flow-through income from a sole proprietorship, partnership, S corporation, farming operation or miscellaneous rental activity. This overly broad definition was used because, for the majority of flow-through business income (partnerships and S corporations), it was not possible to trace income from the business entity to the respective owner(s). Due to newly accessible tax data, this technical constraint has been overcome.

What follows that introduction is a 40-page document in which the IRS attempts to offer a new definition for a small business.

But The Hill's Finance & Economy Blog recently reported that Republican Congressman Sam Graves and Senator Olympia Snowe have objected to any change in the IRS definition of a small business at this time, arguing that "an arbitrary new definition adds unnecessary confusion and complexity" at a time when Congress is arguing over how many small business owners will be affected if the Bush era tax cuts are not extended.

Popular Blog Posts

Friend's Activity