From mom-and-pop shops to venture-backed companies, small businesses are an important part of the American economy. They employ nearly half of the country’s private-sector workforce and account for 43.5% of the country’s gross domestic product. They are credited with driving innovation and providing competitive pressure that forces larger firms to improve their own products. And they are a key driver of economic resilience across the nation.
Nevertheless, there is no standard definition of what constitutes a small business. Federal agencies and states use a variety of criteria to determine whether or not a company qualifies as a small business. Most use a combination of revenue or employee count. For example, a company that has fewer than 500 employees and less than $5 million in annual revenue could qualify as a small business in the United States, but the exact numbers vary by industry.
In addition, some businesses are defined as small by the North American Industry Classification System (NAICS), a set of six-digit codes that can be thought of as UPCs for different industries. The NAICS codes and the size standards that accompany them change by industry, so it’s critical for entrepreneurs to know how to identify their specific industry code before trying to navigate government, regulatory, and trade organizations.
With all of this in mind, it’s no wonder that the term “small business” can be so misleading. While all companies have their own unique qualities, there are certain general features that can help define them as a small business.