Preloader Emblem

What Is a Small Business? Definition and Guide (2024)



Small businesses are the economy’s backbone—a source of employment and industry innovation.

However, pinning down the definition of a “small business” can be tricky, given that it differs by industry, revenue, and employee count.

Here’s what you need to know about small business definitions within the US.

What’s the official definition of a small business in the US?

A small business is a corporation, partnership, or sole proprietorship with fewer employees and typically lower average annual revenue than larger businesses.

The US Small Business Administration (SBA) offers a detailed explanation of what constitutes a small business. Per SBA regulations, a small business:

  • Falls within industry-specific standards for number of employees or annual receipts (total revenue)
  • Operates with a profit-making motive
  • Maintains a business location within the US, primarily functions within the US, or significantly contributes to the US economy
  • Is independently owned and operated, and does not hold a dominant position in its field on a national level

The business entity can take any legal form, such as a sole proprietorship, partnership, or corporation.

Understanding small business size standards by industry

The SBA’s definition of a small business varies by industry, according to industry-specific size standards.

These standards represent the largest total revenue or number of employees that a business can have and still qualify for federal government small business programs. Business size standards range widely in terms of revenue (from $2.25 million to more than $47 million) and employment (from 100 to over 1,500 employees).

Find out if your business is defined as “small”

The SBA classifies industries using North American Industry Classification System (NAICS) codes.

In the SBA’s Table of Size Standards, you’ll find business size standards for each NAICS industry code.

💡 Check the employee count or total revenue limits for small businesses in your industry.

Importance of the SBA’s business size definition

The SBA’s small business definition is important for several reasons. It helps protect and promote small businesses within the larger economy by enabling them to compete against larger corporations.

The designation of small businesses also helps entrepreneurs secure business grants, SBA loans, and government contracts.

Most businesses qualify as “small”

Small businesses are also the largest category of businesses by size. As of 2023, there were more than 33 million small businesses in the US, employing almost half of the private sector.

In fact, by the SBA’s definition, 99.9% of all American companies are small businesses.

Companies with fewer than 20 employees account for 5.4 million small businesses, with around 27 million having no employees, meaning the only worker is the small business owner.

Who are small business owners?

According to the SBA, small business owners are primarily men (63.8%). Women own 20.8% of small businesses, and the remaining 15.7% are equally owned by men and women partnerships.

Women are more likely to run service-based businesses, whereas men own more product or technology-based ventures.

Small business benefits and disadvantages

Generally, a small business has different operational issues than a major corporation. Here are some pros and cons to consider before scaling your small business:

Pros of small businesses

  • Small businesses are known for their adaptability and flexibility.
  • They have less bureaucracy than more extensive operations.
  • They can often devote more time to each customer and industry collaboration.

Cons of small businesses

  • Small businesses often need help borrowing money.
  • They can be outcompeted on pricing by larger companies.
  • They may be restricted to serving a local or regional geographic area.

Other considerations in defining a small business

While the SBA’s definition is widely recognized, other viewpoints exist on what makes a business “small.”

Some define a business based on its number of full-time employees or the property it operates from. A person starting a business at home might be considered a small or micro-business entrepreneur. At the same time, a business with comparable profits that employs multiple people across retail locations might not be thought of as a small business.

Moreover, the legal structure of a business can impact perceptions of its size. For instance, businesses structured as corporations are often perceived as larger, whereas sole proprietorships or partnerships are generally seen as smaller.

Takeaways: small but mighty

  • The legal definition of a small business varies by industry.
  • The US Small Business Administration uses industry size standards to define businesses as “small.”
  • Industry size standards are based on number of employees or annual receipts, and determine eligibility for government grant programs.

In summary, the definition of a small business is multifaceted, encompassing elements such as industry type, annual revenue, employee count, and legal structure.

This complexity mirrors the large number and diverse nature of US small businesses—and underscores their pivotal role in the economy.


Ready to create your first business? Start your free trial of Shopify—no credit card required.

Small business definition FAQ

What defines a small business?

A small business is typically defined as having fewer employees, lower revenue, and operating independently of larger firms. Small businesses are privately owned by an individual or small group of owners.

Does the number of employees matter for small businesses?

The US Small Business Administration uses a business’s employee count to help determine whether it classifies as a small business and can apply for federal programs.

What are three types of small business definition?

Many small businesses are sole proprietorships, which is a business owned and operated by one person. The sole proprietor is personally responsible for all business debts and liabilities.

Limited liability companies are sometimes classified as small businesses. They combine features of both corporations and partnerships. They limit the personal liability of the owners and offer pass-through taxation.

While many corporations are nationally known, some are small businesses. A cooperation is a separate legal entity owned by shareholders. This type of business structure offers limited liability for its owners but is subject to double taxation.

What is a small business example?

A small business example is a retail store, an online store, a restaurant, a bakery, a cleaning service, a landscaping service, or a consultancy business.

What are five types of small businesses?

  1. A retail store that sells goods to consumers
  2. A service business that provides services to businesses or consumers
  3. A manufacturing business that produces goods by transforming raw materials into products
  4. An ecommerce business that sells goods or services online
  5. A freelance business providing services on a contract or project basis



Source link

Categories

Leave a Reply