Understanding the SBA’s Small Business Definition

To meet the government’s small business definition, an enterprise must conform to size standards created by the U.S. Small Business Administration (SBA). These specifications are based either on your revenue or the number of people you employ and vary based on your industry.

Key takeaways

• The SBA’s small business definition varies by industry.
• Depending on your business, the SBA may have specifications for either annual revenue or number of employees.

What’s considered a small business?

In general, independently owned, for-profit enterprises with 500 or fewer employees may be considered a small business. The SBA’s Office of Advocacy, for example, defines a small business as having 500 or fewer employees.

However, the SBA has different qualifications to determine whether you’re categorized as a small business that vary depending on your industry. The SBA uses one of two metrics to categorize businesses in each industry:

1. Average annual receipts is a business’s total or gross income plus the cost of goods sold. To calculate your average annual receipts, take the average of your total income over the last three or five complete fiscal years, including those of affiliate businesses (more on this in a minute). Startup businesses should calculate their average annual receipts by multiplying the average weekly revenue by 52.
2. Number of employees is the average number of people employed for each pay period during the 12 most recent months. The SBA counts full-time, part-time and temporary employees toward the average number of small business employees, including those of any affiliate businesses. Businesses younger than 12 months can use the average of each pay period they have been in business.

Commercial bakeries, for example, can have up to 1,000 employees and still be considered a small business, though retail bakers are only considered a small business if they have 500 or fewer employees. Meanwhile, the SBA defines dance companies as a small business if their annual receipts total $18 million or less.

Affiliate businesses are factored in

A small business must factor the average annual receipts or number of employees of its affiliate(s) into its calculations when determining small business status. Affiliate businesses are companies that are economically dependent on each other in some way.

Example: Let’s say your family owns several companies with different relatives running each one. If you share common ownership or interests, the SBA will look at that total number of employees when calculating your individual company’s small business status.

SBA size standards: Understanding NAICS codes

Now that you understand the SBA’s definition of income and number of employees, it’s time to apply them to your particular industry. Industries are sorted by the North American Industry Classification System (NAICS). A NAICS code is a way for companies to describe what they do. This six-digit number also decides which NAICS size standard — average annual receipts or number of employees — applies to your business.

There are 20 different industry sectors in the NAICS system, and each of these sectors contains a number of subsectors with their own distinct NAICS codes. Under the Finance sector, for example, there are distinct NAICS codes for subsectors like Finance and Insurance, Credit Intermediation and Related Activities and Monetary Authorities—Central Bank.

Below is a sampling of major industries and the maximum average annual receipts or how many employees an enterprise can have and still qualify as a small business. You can find the full Table of Small Business Size Standards on the SBA website.

SBA Size Standards for Specific Industries

Alternative size standards

There are 18 footnotes to the SBA size standards table, meaning that a number of businesses have special considerations. For example, financial institutions are not measured by revenue or number of employees — instead, they’re evaluated by the value of their assets.

SBA size standards revisions

The Small Business Jobs Act of 2010 mandates a review every five years of small business size standards to account for industry changes, federal market conditions and inflation. Since October 2020, the SBA has already proposed changes across multiple industries, including:

• Transportation and warehousing
• Information
• Finance and insurance
• Real estate and rental and leasing
• Professional, scientific and technical services
• Management of companies and enterprises

The SBA considers public comments before deciding to change size standards, which may take up to 18 months.

Do you qualify as a small business with the SBA?

To find out what all of this means for your company, follow these steps to confirm that your company qualifies as a small business:

1. Using the SBA size standards table, find your NAICS code and which small business classification you must meet (average annual receipts or number of employees).
2. Depending on which applies to you, calculate your company’s three-year average annual receipts or the average number of employees for your business.
3. Head to the SBA size standards tool.
4. Enter your six-digit NAICS code and click Next.
5. Based on your NAICS code, the tool will request the average of your number of employees or average annual receipts. Enter your calculation and click See Results.
6. Based on your answer, the tool will confirm whether you meet the small business size standard.

What is the IRS definition of a small business?

The IRS defines a small business as a corporation or partnership with assets under $10 million. But that doesn’t mean you’ll automatically qualify for all tax credits. The Small Business Health Care Tax Credit, for example, is available only to small businesses with fewer than 25 full-time employees that meet certain eligibility conditions.

Advantages of being classified as a small business

Enterprises that meet the SBA small business definition may leverage government loans and contracts to help them stay competitive with larger corporations.

Government loans

Despite the name, the government typically does not lend directly to business owners outside of businesses recovering from declared disaster. Instead, government agencies partner with lending institutions to reduce the lender’s risk and increase accessibility to financing for small business owners. We’ll cover the two main types:

SBA loans

There are several types of SBA loan programs, though the 7(a) loan is the most well-known. Standard 7(a) loans offer general financing of up to $5 million to small business owners. The capital can be used for a wide range of purposes, such as working capital, seasonal expenses, fixed assets and remodeling projects. Here’s more on how to apply for an SBA loan.

The 504 loan program provides financing to purchase fixed assets, such as buildings and machinery or the construction or modernization of facilities.

504 loans consist of three components: up to 40% from a bank, credit union or other approved lender, 50% from a certified development company (CDC) and 10% to 20% as a down payment from the borrower. The SBA will guarantee up to $5.5 million. However, your project size could be much larger, providing funding for $20 million or more.

CAPLines

CAPLines are fixed or revolving lines of credit to help small businesses fulfill cyclical or short-term working capital needs. The four types of CAPLines — contract loan, builders line, seasonal line of credit and working capital line of credit — each fulfill a specific purpose. The seasonal CAPLine, for example, is for financing seasonal expenses related to inventory, labor or accounts receivable.

Microloans

The microloan program features smaller loans of up to $50,000 — ideal for startups or small businesses that don’t require significant capital. The average loan amount is $13,000 and can be used for several purposes, including working capital, inventory or supplies, machinery and furniture.

USDA loans

The United States Department of Agriculture (USDA) has rolled out the OneRD Guarantee Loan Initiative to encourage private investment in rural businesses by increasing accessibility to financing and technical assistance for qualified borrowers. Depending on the program, eligible borrowers include federally recognized American Indian tribes, rural small businesses and agricultural producers.

The OneRD Guarantee Loan Initiative features four programs:

• Water and Waste Disposal Loan Guaranteed Program: Helps private lenders provide financing to qualified borrowers to construct or improve facilities related to clean drinking water and waste disposal.
• Community Facilities Guaranteed Loan Program: Helps lenders provide financing to qualified borrowers to construct essential community facilities, such as hospitals, public safety services and transportation facilities, like roads and bridges.
• Business and Industry Guaranteed Loan Program: Helps lenders provide financing to rural businesses. This capital can be used to develop real estate for commercial purposes, purchase machinery and inventory and even refinance debt if it improves cash flow and creates jobs.
• Rural Energy for America Guaranteed Loan Program: Helps lenders provide financing to agricultural producers and small businesses to create renewable energy systems, including geothermal, hydropower and solar technology. This loan can also fund energy-efficient improvements, such as installing high-efficiency heating and ventilation.

After confirming your eligibility, contact your nearby USDA office for more information on the application process. You can find a list of local state offices on the USDA website. You may also visit your local private lender to see if they offer USDA loans.

Government contracts and grants

There are a variety of government contracts and grants specifically for small businesses. The Historically Underutilized Business Zones (HUBZone) program, for example, increases government contract opportunities for qualified small businesses in urban and rural communities.

Some government grants may also be awarded to companies that satisfy the SBA’s small business definition and other requirements. Keep in mind that some business grants and training programs may be industry-specific or reserved for certain groups, such as women or military veterans.

Tax incentives

Small businesses may also leverage tax incentives to save money. The Small Business Health Insurance Tax Credit, for example, lets eligible small business owners save up to 50% of employee health care costs if they buy insurance from the Small Business Health Options Program (SHOP).

Some cities, like Philadelphia, offer tax credits for entrepreneurs that create jobs by relocating their businesses or creating a new business in their city. The Jump Start Philly program exempts qualifying small businesses from paying the Net Profits Tax and Business Income and Receipts Tax for their first two years if they employ six full-time employees after 18 months in business.