Starting Up a Small Business | What is a 'Small Business'?

Do you own and operate a small business? How do you know? Have you ever considered what being a 'small business' actually means or have you been assuming that since you're the owner (or co-owner) that, by definition, you're a small business?

What is the truth about how small business is defined and how do you find it? That's exactly what we're going to get into!

Let’s get… defined!

You’ll find highlights below. Watch the livestream recording or listen to the podcast version on your favorite podcatcher for all the details!

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What's here for You?

I want to help you understand how small businesses are defined and why it is important to incorporate that definition into your ongoing business planning.

What is a Small Business?

Over the years I've come across a lot of misinformation about what it means to be a small business. Sometimes people think it's determined by the number of employees, sometimes by revenue, even by the corporate structure. As we'll see below it's actually easy to understand why there is confusion identifying what is a small business.

Defining Small Business

So, if there's so much confusion around how to define a business as small then how can we go about doing it correctly?

The good news here is that while it isn't as easy as a single criterion that we can point to, there is a place we can go to find out exactly how to classify our own business as small or not.

There are three pieces of information that you're going to need to put all of this together.

1. Your NAICS Code
2. The Number of Employees
3. Average Annual Revenue (based on three years)

Once you have those three pieces of information you'll be able to get the right answer for answering the question... "What is a small business?" at least, for your case!

Getting Your NAICS Code

After this one everything is pretty easy but don't worry, finding your NAICS code isn't actually that bad either. There is a link in the resources below where you'll find a search engine that will allow you to search the NAICS database by keyword or using a drill-down option. You may have to use a few searches before you end up with the keywords that identify your business type in the database but it shouldn't take more than 15 minutes or so.

Counting Employees?

This one is easy... everyone counts as 1 employee. Full time, part-time, temporary... all count as one (1) each. If you want to read more about it there is a link in the resources below.

Calculating Revenue

Again, pretty straightforward here, in most cases all the money that comes into your business (with some exceptions for disaster relief) counts as income. This one is a bit more complex than the employee calculation so it's worth taking a look at the references in the resources section below.

Why Does it Matter?

Before you go digging through your accounting system, navigating a government website, and counting your employees you might be wondering "What difference can it possibly make?

The first thing to consider here is that there is a wide variety of definitions of a small business based on the NAICS code. It is very important that we don't make assumptions about what constitutes a small business. Without doing the research yourself you can easily get the wrong definition for your small business and inadvertently end up violating the law.

The short answer here is... a lot. The benefits of being a small business range across pretty much every law that covers the structure, reporting, regulation, and control of a business. As you might imagine, the consequences for non-compliance as a larger enterprise can be high. Depending on the law you may find your business hit with fines and, in some cases even personal legal, criminal, and financial liability.

Practical Action

It's time to roll up your sleeves and get to work!

First, get the three datapoints I mentioned earlier.

1. Your NAICS Code
2. The Number of Employees
3. Average Annual Revenue (based on three years)

Second, go to the SBA Table of Size Standards and either use the online table or download a copy.

Third, find the NAICS code for your business in the table and look for the employee and revenue requirements that identify a small business in that category.

Finally, integrate that information into your business plan, and if you're close to the line be sure to start actively reviewing the impact when your business goes from being a small business to a larger entity.

Note: If you find yourself over the line, immediately begin reviewing the regulations that apply to you and taking action to correct deficiencies. You may or may not be required to discuss the issue(s) with relevant authorities but begin preparing to fix the gaps and articulate a corrective action plan in the event that you do.

Additional Resources

NAICS & SIC Identification Tools

How Employees are Counted

How Revenue is Calculated

SBA Table of Size Standards