What Qualifies as a Small Business? And Why?

What Qualifies as a Small Business? And Why?

A significant share of all US government contracts goes to small businesses as per a legal requirement. Working for government contracts can open new doors to sales and revenues for your business. However, whether your company qualifies as a “small business” to be eligible for these contracts depends on the definitions set by Small Business Administration (SBA).

The SBA has set a definition for official small business to help protect and promote small businesses in the larger economy. It is also an important measure to help the smaller units stand against the big daddies of the industry.

What is Small Business as per SBA?

The SBA has outlined 2 numerically measurable parameters to determine if a business qualifies as a small business:
A) The average number of employees over the past 12 months, and/or
B) Average annual receipts over the past three years.

Depending on the industry a small business could have a maximum of 250 employees to a maximum of 1500 employees AND/OR have a maximum average annual receipt of $750,000 to $38500000. The exact figures for both, max employees and max annual receipts vary from industry to industry and you can find a detailed list here.

Anything above the maximum limit of revenue or headcount is considered to be a large enterprise.

To understand clearly if your business falls in SBA’s ambit of small business, you can use the SBA size standard tool.

Other qualifications of a Small Business

Apart from looking at the solid numbers for employee count and revenues, the SBA also looks at some basic qualifications for a company to be certified as a small business. To be categorized as a small business, a company should meet the following criteria.

  • Organized for profit
  • Has a place of business in the U.S
  • Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor
  • Is independently owned and operated
  • Is not dominant in its field on a national basis

The business may be a sole proprietorship, partnership, corporation, or any other legal form. In determining what constitutes a small business, the definition will vary to reflect industry differences, such as size standards.

Stay updated on changes

The SBA Administrator establishes and revises the standard sizes in response to market conditions and inflation based on recommendations from The Office of Size Standards. Visit SBA’s website for the latest information.

Why should SBA’s size definition matter to your business?

If your business qualifies as a small business as per SBA you are eligible to apply for government contracts. It can also help you avail business loans (or SBA loans) from the government and access general tools that can help you compete against your larger brethren.

Putting things in perspective

With a large range of the 2 numeric standards set by SBA, the majority of businesses in the U.S fall under the ‘small business’ category. So, if you consider yourself a small business owner, then odds are you probably qualify as one too. But so would a lot of other companies too.

On a positive side, this wide range allows a lot of companies to benefit from being a small business. E.g. A small soda distribution company is better placed against a biggie like Coca-Cola to get approval for a small business loan or to bid and win government contracts.

But on the flip side, even a business with 1500 employees is still categorized as “small” and has the same protection, privilege, and SBA support as would a business with a headcount of 10. The same goes for the revenue figures as well. This could lead to small or micro businesses not getting the aimed edge.