What Is A Small Business?

Monday Apr 5th 2004 by Patricia Fusco
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How the SBA defines U.S. small businesses greatly determines the way they interact with federal agencies and financial institutions. Are the size standards for your small business changing? Learn more about the proposed adjustments.

The way one defines oneself can greatly determine the way in which one interacts with the world. For example, a minister interacts with a church-going congregation quite differently from the way a punk rocker interacts with an audience. To a certain extent, the roles are similar by definition — preaching to the crowd. However, participant's expectations for either event would be quite different.

It's the same way for small businesses. How a small business defines itself greatly determines the way it interacts with a community and other businesses. More importantly, how the U.S. Small Business Administration defines a small business greatly determines the way they interact with federal agencies and financial institutions.

Right now, the U.S. Small Business Administration is seeking to modify size rules that govern small businesses. What's the reason behind the realignment? The federal government wants to make it easier for companies to determine whether they qualify for small business programs like SBA loans and government contracts.

The U.S. government is the world's largest buyer of products and services. Purchases made by military and civilian installations amount to nearly $200 billion a year, and include everything from computer software to janitorial services. In short, the government buys just about every category of commodity and service available. By law, federal agencies are required to establish contracting goals so that 23 percent of all government purchases go to small businesses.

The Small Business Act states that a small business concern is "one that is independently owned and operated and which is not dominant in its field of operation." Currently, the law also states that determining what constitutes a small business varies from industry to industry. That's why the SBA matched its original table of small business size standards with the North American Industry Classification System (NAICS). The most common current size standards are as follows:

  • 500 employees or fewer for most manufacturing and mining industries

  • 100 employees or fewer for all wholesale trade industries

  • $6 million in annual revenue for most retail and service industries

  • $28.5 million in annual revenue for most general & heavy construction industries

  • $12 million in annual revenue for all special trade contractors

  • $0.75 million in annual revenue for most agricultural industries

Under the new proposal, some small businesses would be redefined by how many people work for a company, others would find new revenue caps in place. The SBA currently has more than 35 different size standards that apply to more than 1,150 industries. Some of these standards use employment numbers, while others use average annual revenue. The new guidelines would prune the size maximums on 10 different industries — ranging from 50 employees to 1,500 employees — depending on the industry and the government programs involved.

SBA Proposed Changes to Small Business Size Standards by IndustryFor a limited number of industries, the agency also proposes to cap annual average revenue, including construction, computer services and consulting services. The SBA wants to make sure that large companies do not qualify as small businesses by artificially keeping their employment levels low through outsourcing. It only makes sense that legitimate "small businesses" would meet both the employee-based size standard and also not exceed the "receipts cap" to qualify for federal programs.

Interestingly, one specific revision would change the nonmanufacturer size standard applicable to Federal procurements from 500 employees to 100 employees — the same size standard that applies to wholesale trade businesses and all other SBA programs. The move could make it easier for smaller nonmanufacturing tech vendors to pickup government research grants and contracts.

This complements a size standard that the SBA changed in January. The federal agency established a new industry category and set the size standard of 150 employees for IT value-added resellers. This industry category and size standard were established to improve small business eligibility requirements for picking up federal contracts on computer hardware and software.

Conversely, restaurants could be the most likely type of business to lose small business eligibility, because their maximum size would change from $6 million in annual revenue to 50 employees. Remember, all employees are equal under the SBA — part-time personnel are counted just like full-time staffers.

The SBA has provided a list of frequently asked questions to help small businesses understand the proposed rule and its implications. The SBA cautions that the FAQ are meant merely to simplify some of the more basic concepts of the proposed rule, and they cannot replace reading the proposed rule itself. Interested parties should submit comments based on the proposed rule — rather than on the FAQ — by May 18, 2004.

When the SBA redefines size standards and revenue caps, some small business owners will find that it will change the way they interact with federal agencies and financial institutions. Hopefully, the new guidelines will be good news for most U.S. small businesses — high-tech and low-tech alike. If a business caters to the federal government or seeks to secure a small business loan, it only makes sense to be certain how the new definitions could impact the business — before the new size standards are in place.

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