What Is a Small Business?

A small business is a company of relatively limited size, as measured by 🎃its revenue or number of employees, or both.

Often described as the backbone of the U.S. economy, small businesses range from sole proprietorships to partnerships and corporations wi♑th multiple owners and sometimes hundreds of workꦏers.

According to the U.S. 澳洲幸运5官方开奖结果体彩网:Small Busines🍌s Administration (SBA), there are more than 34.7 million small businesses in the country today, employing around 59 million Americans.

Understanding Small Businesses

Small♓ businesses are typically defined by metrics such as t𒈔heir number of employees and their annual revenues.

For simplicity’s sake, the SBA’s Office of Advocacy generally defines a small business as “an independent business with fewer than 500 employees.”

But, as explained in the next section of this article, under the SBA’s official standards, a small business actually may have as many as 1,500 employees, depending on the industry, and its annual revenue can range as high as $40 million.

Most small businesses, however, are truly small. In 2024, according to SBA data, close to 82% of small businesses in the U.S. were one-person operations, with no employees aside from the owner.

NAICS Codes and Small Businesses

The federal government established the North American Indust🏅ry🍒 Classification System (NAICS) in 1997.

Its purpose, according to the U.S. Census Bureau, is to create a standard that federal statistical agencies can use in “classifying business establishments for the purpose of collecting, analyzing, and publishing statistical data related to the U.S. business economy.”

Identifying Digits

The NAICS assigns six-digit codes to businesses. The first two digits refer to the sector of the economy in which they operate, the next two to their particular subsector and industry.

The remaining digits𒀰 further define the type of ꧃business it is.

For example, the latest codes indicate that an orange grove is 111310, while an apple orchard is 111331, and an advertising agency is 541810, while a public relations agency is 541820.

The NAICS codes do not differentiate between small and large businesses. For example, both a single-person ad agency and one with thousands of employees and offices all over the world would have the same six-digit number.

NAICS Codes and Small Business Size Standards

However, the Small Business Administration uses the codes and applies its own size standards,⭕ either annual receipts or number of employees, to determine what constitutes a small businessꦫ within a particular field.

By Revenue

The SBA defines annual receipts as the company’s total income or 澳洲幸运5官方开奖结果体彩网:gross income plus 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS).

For example, an orange grove qualifies as a small business if it takes in no more than $4 million annually, while an apple orchard can take in up to $4.5 million.

An ad agency is small if its revenue is under $25.5 million, while a PR agency can only have revenue of up to $19 million and remain small by definition.

By Employees

When the SBA divides businesses into ♎small and large by the number of employees, the maximums can vary widely across industries.

For example, a fruit and vegetable wholesaler can have no more than 100 employees and be considered small, while an aircraft manufacturer can have as many as 1,500. Generally speaking, 1,500 is about the maximum for any enterprise under current rules.

The SBA size standards are especially important for businesses competing for government programs o𒆙r contracts, as explained below.

The SBA website has a that businesses can use to see ✨if they qualify as small under its criteria.

Importance of Small Businesses

Small businesses are vital to the U.S. economy. In fact, by its definition, the SBA’s Office of Advocacy says small businesses constitute 99.9% of U.S. businesses overall. Together, they account for 43.5% of the country’s gross domestic product (GDP) and 39% of private-sector payrolls.

Small businesses also accounted for 61.1% of net new job creation from 1995 to 2023.

Small Business Resources

Small businesses that qualify are eligi🐼ble for funding and other forms of assistance through the federal government, state and local governments, and private and nonprofit sources. Among the major ones:

SBA Loans

The SBA doesn’t offer loans itself but provides guarantees 🔥to approved lenders, making it 🍃easier for small businesses to borrow money.

澳洲幸运5官方开奖结果体彩网:SBA loans range from $500 to $5.5 million and can be used for working capital or to finance the purchase of fixed assets, such as machinery. The SBA also has a loan program for exporters.

Grants

澳洲幸运5官方开奖结果体彩网:Small-business grants, which normally do not have to be paid back, are harder to obtain than loans. The SBA doesn’t provide༺ grants for starting or expanding small businesses, but the federal government has several grant pr๊ograms for specific types of businesses.

Two of them are the Small Business Innovation Research (SBIR) program and the Small Business Technology Transfer (STTR) program.

The U.S. Treasury Department, through its State Small Business Credit Initiative, also provides money to states, U.S. territories, and tribal governments which they can use to support small businesses in their area.

In addition, some state and local governments and a number of private corporations have their own
grant-making initiat🔴ives aimed at encouraging small business.🦄

Government Contracting

As the SBA points out, “The U.S. government is the largest customer in the world. It buys all types of products and services—in both large and small quantities—and it’s required by law to consider buying from small businesses.”

To facilitate that, the SBA offers programs to help small businesses compete for federal contracts, some targeting specific types of business owners, such as women, Native Americans, or military veterans.

It also administers Small Business Development Centers in every U.S. state and territory, in conjunction with the private sector, educational institutions, and state and local governments. Their goal is to provide resources to current and would-be small business owners.

Types of Small Business Structures

Small businesses can choose to structure themselves in a variety of ways for 澳洲幸运5官方开奖结果体彩网:tax and legal purposes. Here are the common types, listed in relative orderꦅ of complexity.

Sole Proprietorship

The simplest and most common type of small business, 澳洲幸运5官方开奖结果体彩网:sole proprietorships can have only one owner. The owner doesn’t have to file a separate tax return but reports their business income (or losses) on a 澳洲幸运5官方开奖结果体彩网:Schedule C form attached to their regular 1040 tax return.

Partnership

If two or more people want to own a business together, they can form a partnership. Partnerships come in two basic types: 澳洲幸运5官方开奖结果体彩网:limited partnerships (LPs) and 澳洲幸运5官方开奖结果体彩网:limited liability par💝tnerships (LLPs).

In a limited partnership, one person serves as the 澳洲幸运5官方开奖结果体彩网:general partner and takes on most of the liability🦂, or risk, for the company, while the other partner or partners have more limited exposure.

In a limited liability partnership, all partners have limited liability. In both cases, the income from the business 澳洲幸运5官方开奖结果体彩网:passes through to the owners, who report it on their individual tax returns.

Limited Liability Company

A 澳洲幸运5官方开奖结果体彩网:limited liability company (LLC) can have one or more owners. As with the two types of partnerships above, it is set up to 澳洲幸运5官方开奖结果体彩网:reduce the ow❀ner’s or owners’ personal liability in the event of a lawsuit or other financial difficulty. LLC income can be reported on either an individual tax return or a business tax return.

Corporation

澳洲幸运5官方开奖结果体彩网:Corporations can also shield their owners from financial liability resulting from the actions of the business. There are two basic types: S corps and C corps.

S corps can have from one to 100 owners, who report their share of the company’s prof𝐆its or losses on their individual tax returns.

C corps, which are probably what most people think of as a corporation, can have a single owner or many thousands of them, in the foಞrm of shareholders.

C corps file 澳洲幸运5官方开奖结果体彩网:corporate tax returns. Any 澳洲幸运5官方开奖结果体彩网:dividends that they pay out are also taxable on the recipients’ individual tax returns. This situation is sometimes referred to as 澳洲幸运5官方开奖结果体彩网:double taxation.

Benefits of a Small Business

Small businesses can beไnefit their owners in a range of ways.

• The business is likely to be less bureaucratic than a large company, allowing its owner or owners a greater degree of autonomy.
• If the business is profitable, its owners also stand to benefit financially more directly than they would as employees of a larger enterprise.
• Owning a business can also entitle a person to a long list of tax deductions for which they might not otherwise be eligible. For example, if they work out of 澳洲幸运5官方开奖结果体彩网:a home office, they may be able to write off a portion of their housing costs.

Challenges Facing Small Businesses

Running a small business isn’t for everyone.

• Just as owners stand to profit more if the business succeeds, they may suffer more financially if it fails. Many owners put their life savings on the line.
• Small businesses may find it harder to raise capital for expansion or other purposes.
• They may also have more trouble hiring employees in a tight labor market if they’re unable to offer wage and benefit packages that are competitive with their larger counterparts.
• SBA figures show that while 1.4 million business establishments opened in 2022, approximately 1.2 million establishments closed. 

However, many small busine🌊sses manage to overcome the obstacles if they can establish themselves and maintain a foothold.

According to the SBA Office of Advocacy, "While more than half of establishments close before five years, more than two-thirds (69.5 percent) that reach five years reach ten. The survival rate increases further after that as well, with 76.5 percent of establishments that reach ten years also reaching fifteen."

The Bottom Line

Small businesses♌ play a big role in the U.S. economy. While they can be risky for their owners, they also hold the potential for significant financial rewards.

In addition, studies have shown that small business owner🐽s are oไften happier in their jobs than people who work for others.

In 2024, the Pew Research Center reported that 60% of self-employed workers were highly satisfied with their job, compared with 49% of those who are not self-employed.