A small business can be a lot of things: a local bakery, an auto repair shop, a hotel franchise.
Small? Yes. Few and far between? Not even close.
In terms of company size, small businesses are by far the most plentiful, making them a vital piece of the American economy. Small businesses are everywhere, but what exactly makes them seen as small? When determining business size, two elements are considered: annual receipts and the number of employees.
What qualifies as a small business?
While it depends on the industry, a small business generally makes less than $38.5 million in annual receipts and has fewer than 1,500 employees.
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Types of small businesses
There are four core types of small businesses.
- Sole proprietorship: A small business that is owned and operated by one person. This individual is responsible for all business-related liabilities and debts.
- Partnership: A small business owned by two people, where both owners invest their money, labor, and property into the business, making them both liable for business debt.
- Limited Liability Company (LLC): This business structure combines elements of both partnerships and corporations, while limiting the personal liability of the owners. This type also offers pass-through taxation. Meaning, the company's earnings and expenses “pass through" to the business owner's tax return. The owner pays tax on profits or deducts losses, along with other personal income and expenses.
- Corporation: A separate legal entity owned by shareholders. This structure offers limited liability for owners, but is subject to double taxation, which is when income is taxed at both the corporate and personal levels.
Small businesses by industry
While a general definition of small business does exist, it's important to note that each industry defines small business a little differently. Because each industry creates its own miniature economy based on what the businesses offer, the current demand for those offerings, and the competition among businesses within that realm, the small business definition differs in each industry.
Below are the size standards broken down by industry for small businesses.
- Agriculture: Maximum of $750,000 in annual receipts.
- Mining: Maximum of 250 to 1,500 employees.
- Utilities: Maximum of 250 employees for renewable energy, and a maximum of 1,000 employees for electric and gas businesses.
- Construction: Maximum of $36.5 million in annual receipts.
- Manufacturing: Maximum of 500 to 1,500 employees.
- Wholesale trade: Maximum of 100 to 250 employees.
- Retail: For about one-third of businesses, the standards are set at $7.5 million in annual receipts, while others are a maximum of 100 to 500 employees.
- Transportation and warehousing: Maximum of 500 to 1,500 employees and $7.5 to $37.5 million in annual receipts.
- Information: Maximum of 500 to 1,500 employees and $7.5 to $38.5 million in annual receipts.
- Finance and insurance: Maximum of 1,500 employees and $32.5 to $38.5 million in annual receipts.
- Real estate: Maximum of $7.5 to $32.5 million in annual receipts.
- Professional services: Maximum of 1,000 to 1,500 employees and $7.5 million in annual receipts.
- Healthcare and social assistance: Maximum of $7.5 to $28.5 million in annual receipts.
Certain industries classify according to annual receipts, some based on the number of employees, and some take both into account. Because these discrepancies exist, defining a small business must be done with the appropriate industry in mind.
However, if you want a general description of a small business, they make less than $38.5 million in annual receipts and employ fewer than 1,500 people.
Other characteristics of a small business
Other factors besides industry, the number of employees, and annual receipts are also taken into account when the Small Business Administration (SBA) distinguishes a small business from a mid-market or large enterprise.
Here is what else the SBA analyzes:
- Where the company is headquartered
- Where they do most of their business
- If it's a non-profit or for-profit business
- If it's owned and operated independently
- If it's a minority in its industry
Why does business size matter?
While other things like productivity, leadership, and company culture are more important, the size of a business still matters. When you identify as a small business, there are certain benefits that come along with it.
The SBA offers loans, as well as business, finance, and entrepreneurial programs to aspiring small business owners to support their mission of providing aid and contributing to the health of the economy.
Standards of business size are set, so these loans and programs are only available to the small businesses that need them to compete with mid-market and large enterprises. Business size also matters when measuring economic impact and success. You can’t properly compare Walmart to a local mini-mart without taking size into account.
Small business, big impact
While certain businesses are identified as “small,” their contributions to the economy are not. Among other benefits, small businesses employ local workers, create diversity in business ownership, and help create a community identity.
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This article was originally published in 2019. It has been updated with new information.
