According to the Small Business Administration (SBA), there are more than 30 million small businesses in the United States. Is your company one of them? The term should be easy to define, but it’s not always clear-cut. To answer the question, “What is a small business,” we need to learn what factors are considered. Even then, government agencies that provide business aid sometimes don’t agree.
Who Decides if You’re a Small Business?
The SBA generally defines what small business means in the United States using affiliates, annual receipts, and the number of employees.
Generally, though, a small business:
- “Is organized for profit,
- Has a place of business in the US,
- Operates primarily within the US or makes a significant contribution to the US economy through payment of taxes or use of American products, materials, or labor
- Is independently owned and operated and is not dominant in its field on a national business.”
The other important factor is your industry, as size requirements vary from industry to industry. For example, a retail bakery can only have 500 workers, while a commercial bakery can have up to 1,000 workers before losing its designation. The SBA keeps a long list showing the annual receipt and employee limits sorted by industry.
Small Business Affiliates
It’s important to understand that any business you control (an affiliate) could be used to determine whether you are a small business or not. Control usually occurs when:
- One entity owns 50% or more of another company.
- Contractual arrangements between parties give power to one.
- One or more entities or individuals own a larger share than other parties.
Combining your income and employees with an affiliate’s could affect your small business designation.
Annual Sales or Receipts
The SBA looks at your company’s total income plus the cost of goods sold to determine whether you are a small company.
Total income is determined by averaging receipts over the past three or five years. For businesses that have not operated for at least three years, the SBA multiples the company’s average weekly revenue by 52.
Number of Employees
Of course, this number can vary. The SBA looks at the average number of workers for each pay period for the last 12 calendar months. For companies less than 12 months old, the number of employees is the average for each pay period. As long as your company stays below the employee limit for your industry and is not disqualified by any other factors, you will likely keep your designation.
Why Does the Designation Matter?
If government agencies, including the SBA, don’t feel your company is a small business, you might miss out on incentives programs, government contracts, grants, and loans.
Attorney Richard Sierra at the Florida Small Business Center assists clients like you with business and litigation matters. As always, Our Goal Is to Help You Succeed™. For an appointment, you may call us at 1-866-842-5202 or use the contact form on our website. We represent clients throughout the State of Florida, including Coral Springs, Coconut Creek, Boca Raton, Delray Beach, Pompano Beach, Sunrise, Fort Lauderdale, Miami, West Palm Beach, Jupiter, Deerfield Beach, Stuart, Port St. Lucie, Orlando, Naples, Fort Myers, Sarasota, Tampa, and surrounding communities.