What is a small business? Why the definition matters
Discover how your business designation can impact factors like funding, taxes and growth strategy. Presented by Chase for Business.
- A small business is an independent business with a limited number of employees that is not considered a major player in its sector.
- Small business guidelines are set by the Small Business Administration (SBA) and include factors like employee count, industry and revenue.
- There are government loans, grants and contracts available to businesses that meet the small business definition.
Being classified as a small business is more than just a label—it can be a strategic advantage. Whether you are a solo operator or a growing enterprise with hundreds of employees, the designation of your small business can influence factors from loan options to contract opportunities.
This article breaks down what being a small business actually means for your finances, how it impacts your daily operations and how you can leverage this designation for loan options, tax advantages and strategic growth.
What is a small business?
A small business is an independently owned and operated company that doesn't hold a dominant position in its market. While this is a general guideline, the specific criteria often depend on details like your industry, revenue and employee headcount.
The term “small business” spans a wide range—from a solo freelance operator to a company with hundreds of workers. Because the SBA varies its standards to reflect differences in industry structure and competition, the definition is highly dependent on your sector. For example, in manufacturing, a small business may have up to 1,500 employees, while in retail, the threshold is typically under $20 million in annual revenue.
How do government agencies define a small business?
Government agencies, such as the SBA, play a key role in setting official standards. The SBA establishes size guidelines for every industry, typically referencing the North American Industry Classification System (NAICS).
The most common factors considered are:
- Employee count: Many industries have a cap on employees, ranging from about 100 to 1,500.
- Annual revenue: Some sectors use gross receipts to determine business sizeOpens overlay, with thresholds usually from $1 million to more than $40 million (depending on factors such as industry).
- Industry: Each industry has its own standards. For example, the construction industry’s benchmarks for qualifying as a small business differ from the retail industry.
- Independence: Small businesses typically need to be independently operated and not be a major player in their sector.
These benchmarks may help determine whether your business can participate in federal support programs and access government contracts or resources. Bear in mind that state and local definitions may be different, so it might be helpful to verify the definition of a small business with local agencies as well.
Why does the small business definition matter?
Understanding if your company meets the small business definition can have real-world impacts to your bottom line, cash flow and long-term strategy. For example, qualifying as a small business may provide access to certain government loans, grants and contracts.
Your classification can also play a role in tax obligations and regulatory requirements. And depending on your industry and setup, you might face certain compliance or reporting rules tied to your small business status.
Here are a few areas you may want to learn more about if you’re a small business owner:
Access to specialized funding
One of the potential advantages of small business status is eligibility for SBA-backed loans. Because the government guarantees a portion of these loans, lenders are often able to offer lower down payments, longer repayment terms and more flexible qualification criteria than other business funding options.
Government contract eligibility
The federal government is a large purchaser of goods and services, and it sets aside a specific percentage of all federal contracting dollars exclusively for small businesses. Qualifying for these government contracts may allow you to bid on lucrative, long-term projects without having to compete against massive, multinational corporations.
Tax advantages
The IRS offers several tax benefits designed specifically to support smaller enterprises. Depending on your business structure, you may be eligible for the Qualified Business Income (QBI) deduction, which may allow eligible self-employed and small business owners to deduct up to 20% of their qualified business income.
Additionally, provisions may allow you to deduct the full purchase price of qualifying equipment or software in the year it was purchased, potentially reducing your tax liability and keeping more cash in your business.
You may want to consult with a tax professional about your specific situation.
Strategic growth and cash flow
Understanding your status can be an important part of strategic scaling. As your revenue and headcount grow, tracking these metrics may help you maximize your small business benefits while you still qualify for them. Taking full advantage of these programs may allow you to build a strong cash flow foundation before you transition into a mid-market company and face a new regulatory and competitive landscape.
Frequently asked questions
How do I know if my company is a small business?
You can find your NAICS code and compare your revenue and employee count with the SBA's standards for your sectorOpens overlay.
Can a company with 500 employees still be considered a small business?
Yes, in many industries, businesses with up to 500 employees—or more in certain fields—still meet the criteria.
Why do government agencies have different small business definitions?
Agencies vary their standards to reflect differences in industry structure, levels of competition and economic role.
Does my business structure affect small business status?
Various structures can qualify, but size and industry remain the primary determining factors.
What happens if my business outgrows the small business size standard?
Exceeding the size limits means you may no longer qualify for programs and contracts set aside for small businesses.
Is my side hustle or freelance work considered a small business?
Yes. If your side hustle or freelance business is generating independent income with the intent to make a profit, the IRS generally considers it a small business.
