There is a particular set of criteria that define small business in the United States. The US government has rules for determining whether a business can considered a small business or not. To be eligible for subsidized small business loans, government packages and even contracting opportunities, you first have to understand what defines a small business.
According to the Small Business Administration, approximately 98% of the total number of employer firms are small businesses. Additionally, more than 50% of private sector employees work for some small business or another. Still, for many, the definition of small business is rather vague. The small business definition is much like the Mcdonald’s menu, you can sort of pick and choose different factors to create your own definition of small business. This post will describe the factors that define a small business quite clearly.
What Is A Small Business?
The most widely accepted small business definition has been provided by Small Business Administration or SBA. The definition provided by Small Business Act in the United States is too broad to be helpful to everyday business owners. To create better understanding, the SBA has created its very own standardized definition of small businesses. According to the SBA, a manufacturing or mining small business cannot have more than 500 employees. Secondly, any non-manufacturing small business is defined by its annual receipts. For these businesses, the SBA standards limit the annual receipts to $7 million on an average. Either way, if you have less than 500 employees and $7 million in revenues, you are considered small business.
Small Business By Industry
It is important to understand that the small business definition varies by industry. For example, an IT reseller business is only classified as a small business if they employee under 150 people, while a cane sugar plant can still be considered a small business with over 700 employees. Just because your business qualifies for WordPress for small business does not mean you are considered a small business in the eyes of the government. Interesting, right? This is very important for all business owners to keep in mind.
Small Service Business
In the service industry, small businesses are identified using different methods. The size of service businesses is determined by average annual receipts. Typically, the average of the last three years of gross annual receipts will be used to determine service business size. This is different than the traditional employee model for classifying small businesses. If you own a small service business, this is a must-remember.
Low Start-Up Costs
Next, low start up costs are one of the main characteristics that define small businesses. However, the cost of starting a small business will vary, depending on the type of services or products the business offers. Of course, the small business model plays a pivotal role to determine start up costs. Not all small businesses have to grow exponentially, many are best operated at a small scale. For example, the following small businesses can operate better at a smaller size: flea market stores, computer repair shop and consultancy businesses. However, theses small businesses do have start up costs, buying some inventory, furniture, equipment and commercial space.
Lack Of Funding
Business funding challenges are another common characteristic among small businesses. Most times, owners do not have the required capital to fund their business endeavors. They use line of credits, merchant cash advances, peer to peer loans and alternative lending sources to secure the required cash. Additionally, some owners, who meet the SBA standards, apply for SBA guaranteed loans. However, the association carefully scrutinizes the business profile, including data like the annual income and number of employees.
Serves A Smaller Market
Generally, small businesses serve a comparatively smaller market than the large enterprises and fast growing startups. The rules and regulations that define a small business prevent it to serve a larger market. If a small business continues to scale up and its market size expands, it will no more be considered an official small business by definition. But, of course, that is a nice problem to have.
Location And Portability
Many small businesses can be defined by their location. Almost certainly, business which are run from home, probably make less then $7 million with under 500 employees. They probably also have a little bit of business debt, but this is not a requirement. Additionally, the same idea goes for small businesses that are portable like seasonal shops or holiday businesses. In most cases, small businesses operate out of a single location which can be an easy way to define the business (although not official).
Number Of Employees
As mentioned earlier, the number of employees is a major factor to define a small business. Owners often run small businesses single-handedly. Some small businesses employ one or two employees, only during the peak seasons. Moreover, small clothes or handcrafted product businesses employ only employ a small number of craftsmen and workers. As you can imagine, small business owners keep the total employee number in check to keep overhead low and stay profitable.
To define small business, your financial business plan has little to no bearing. Understanding the important factors in this determination is essential. Understanding this definition will com ein handy for your FICA taxes. Small business have a limited revenue and number of employees. They are usually not traded publicly because of size. However, being considered a small business can help you eligible for special loans and government contracts. Plus, any small business can outgrow its definition.
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