How to qualify as a small business
When it comes to business, bigger isn’t always better. There are some advantages to being classified as a small business. For example, you can get access to government contracts set aside only for small businesses. But which businesses qualify as small? To help you find out if your business meets the standards to qualify as small, read these guidelines from the Small Business Administration (SBA).
Related: 6 Tips for small business success
Which businesses qualify as small?
In order to identify those businesses that are considered ‘small,’ the SBA looks at the number of employees and the business’s annual receipts. The qualifications vary depending on the industry. Each industry is identified by its NAICS code.
What’s your NAICS code?
To determine if your business qualifies as ‘small,’ start by identifying your NAICS code.
NAICS stands for North American Industry Classification System. There is an NAICS code for each specific industry, from marketing and telemarketing, to landscape and architectural services. Once you determine your NAICS code, you can use it to find the industry-specific requirements to qualify as a small business. You can look up your NAICS code or use the SBA’s size tool.
To classify a business as ‘small,’ the SBA takes into consideration either the number of employees you have or the amount of revenue you bring in annually. Which of these metrics they look at, as well as the maximum amount, varies by industry.
Number of employees
For some industries, the SBA will consider the number of employees as a measurement of whether or not you are classified as a small business. The maximum number varies based on the industry you are in. For instance, if you are in the book publishing industry, you must have 1,000 or fewer employees to be considered a small business. If you are a wholesaler of home furnishings, however, you must have no more than 100 employees to be considered a small business.
When counting employees, the SBA considers full-time, part-time, and temporary employees, including those who you employ through a temporary agency. It does not include independent contractors or volunteers.
In other industries, there is a limit to the amount of revenue your business can generate each year if you want to be classified as a small business. For instance, if you own an automotive repair shop, your business cannot exceed $8 million in annual revenue. If your business engages in highway, street, and bridge construction, you can have up to $39.5 million in annual receipts and still be considered a small business.
Annual receipts is defined as total income plus cost of goods sold, including income from sales, interest, dividends, rents, royalties, commissions or fees, minus returns and allowances. This number will be on your income tax return as “total income” or, if you are a sole proprietor, “gross income.”
When determining if you qualify as a small business, you must also include the annual receipts or number of employees of any affiliates. Affiliates are defined by the SBA this way: “Affiliation exists when one business controls or has the power to control another or when a third party controls or has the power to control both businesses. Control may arise through ownership, management, or other relationships or interactions between the parties.” For more detailed information on affiliates, visit the SBA website.
Benefits for small businesses
As a small business, you get access to certain government contracts that larger businesses are excluded from bidding on. There are other programs for specific types of small businesses, such as the women-owned small business contracting program, veteran-owned small business contracting program, and more.
If you apply for one of these programs and get denied, it could be because your business does not qualify as small. However, if you believe this to be incorrect, you can file a protest.
As a small business owner, you’re part of a growing and thriving community. Take advantage of more tips, guides, and information to help your business succeed on our Grow Your Business page.
And to protect your business from risks you can’t see coming, look into these business insurance options.