Small Business

What Is a Small Business?

According to the US Office of Advocacy, a small business is one with fewer than 500 employees. Additionally, Part 121 of the Code of Federal Regulations (CFR) has introduced more in-depth requirements for what is considered a small business.

According to the CFR, a small business is an independently owned, for-profit organization that has a place of business and operates primarily within the country or makes a significant contribution to the American economy. Small businesses don’t have a lot of market share, which means they aren’t a household name or dominant in their field.

Defining Small Businesses by Industry

Although the Office of Advocacy and the CFR have clear-cut definitions, the US Small Business Administration itself has a more complex answer to the question of, “What is a small business?” This federal agency’s definition varies according to the industry in which a business operates.

For each industry, the definition of a small business is based on the number of employees or average annual receipts. These parameters, referred to as “size standards,” act as limits. Businesses that exceed them are no longer considered small.

Size standards are based on the North American Classification System, which is a set of six-digit codes developed by the federal government that categorizes businesses based on their sector, subsector, industry, and type. The following table includes some examples of the SBA’s size standards.

The SBA's Table of Small Business Size Standards contains the full list of size standards for each sector and industry.

Resources That May Be Limited to Small Businesses

With more than 33 million of them spread across the US, small businesses account for 99.9% of all businesses. In the 26 years between 1995 and 2021, small businesses were responsible for creating 17.3 million net new jobs.

The federal government recognizes how important small businesses are to the US economy. Consequently, it sets aside certain resources to ensure that small businesses can continue to thrive. Here’s a list of resources that are exclusive to organizations that can be classified as small businesses.

Loans

While the SBA doesn’t lend money to small businesses, it does guarantee loans through approved lending institutions. This is done to reduce lender risk and increase small business owners’ access to funding to start or expand their businesses. SBA loans can be anywhere from $500 to $5.5 million and include the following loan types:

• 7(a) loans: Provides guarantees to lenders so they can help small businesses with a variety of financial needs
• 504 loans: Provides long-term, fixed-rate financing through non-profit partners (called Certified Development Companies) for major fixed assets
• Microloans: Provides up to $50,000 through non-profit, community-based intermediary lenders and cannot be used for debt or real estate

SBA loans often come with competitive terms, unique benefits like lower down payments, and counseling and education to help small business owners use their financial capital wisely.

Grants

Grants are funds provided to small businesses that don’t have to be paid back. While the SBA doesn’t offer startup or business growth grants, the federal agency does offer grants for specific purposes.

This includes research and development, supporting veterans (including service-disabled veterans), and supporting nonprofit microenterprise development organizations. Special grants are also available to help businesses that want to export.

The US Department of Treasury also offers the State Small Business Credit Initiative. This $10 billion program offers both funding and technical assistance to help small businesses achieve growth and success.

The USDOT accomplishes this goal by providing money to states, territories, and tribal governments to create their own funding programs. These programs may offer loans, equity/venture capital opportunities, and more.

Contracts

The federal government buys goods and services from businesses of all types through the federal contracting process. The government reserves some contracts specifically for small businesses to support a level playing field. This method has proven effective, as small businesses win about 23% of all federal contracting dollars.

Some contracts automatically go to small businesses of a particular socioeconomic status. These include businesses in historically underutilized business zones and those owned by women or service-disabled veterans.

Small business owners will likely have to certify their business through the System for Award Management (SAM.gov) or apply for certification with the SBA.

Health Insurance

Realizing that it can be challenging for small business owners to provide employee benefits, the federal government created the Small Business Health Options Program (SHOP) to help small business owners offer health insurance options.

This insurance exchange allows small business owners to control which coverage options they offer and how much they pay toward employee premiums.

Note that the SHOP program uses different business size requirements than typical SBA programs. Consequently, it’s only open to small business owners with between one and 50 full-time employees. Those with fewer than 25 employees may qualify for a tax credit worth up to 50% of the premiums they paid.

Most Common Small Business Structures

Because the federal government defines and qualifies small businesses based on size or revenue and not tax structure, small business owners can choose to structure their business as they see fit. These are some of the most common small business structures:

• Sole proprietorship: An unincorporated single-owner business where there’s no distinction between business and personal assets and liabilities
• Partnership: A business structure where two or more people share ownership (and, in some cases, liability) of the company
• Limited liability company: A business with one or multiple owners that limits personal liability and allows for either pass-through or corporate taxation
• Corporation: An incorporated business that’s separate and distinct from its owners and operates with a board of directors

86.5% of small businesses that don’t have employees are sole proprietorships. However, over half of small businesses that do have employees are S-corporations.

Benefits and Risks of Small Businesses

Starting a small business is often an exciting venture, but it can undoubtedly be daunting as well. Here are some of the benefits and risks that small business owners can expect to take on when they open their doors.

Small Business Benefits

Small businesses are popular for a reason. Typically, they offer many benefits to business owners:

• More freedom for business owners who won’t have many people to answer to
• More flexibility to respond to external changes in the industry or market
• Less payroll and other expenses, which can translate to bigger personal profits for the business owner
• More opportunities for employees to see the direct impact of their work, which can increase employee engagement and satisfaction
• More trust from the local community, especially when customers can see and interact with the business owner

These benefits make starting a small business very appealing for those who have an entrepreneurial spirit but find themselves with limited funding.

The Risks of Small Business

Despite all of the benefits that small businesses offer, it’s important for aspiring entrepreneurs to realize that they do come with some challenges:

• Less access to capital, especially through traditional bank loans
• Less free time for owners, who may have to work long hours and take on multiple roles throughout the business
• Higher risk of financial harm if the business fails
• More difficulty attracting top talent when competition for labor is high
• More difficulty finding stable staffing when the business is very small

These challenges don’t have to stop someone from opening a business they’re truly passionate about. However, they’re important to consider and prepare for as you attempt to start and grow a small business.