Small businesses are eligible for different kinds of assistance from governments. To be eligible for these, your business must not exceed the size prescribed under small business size standards. An awareness of applicable regulations at your small business start would help you organize purposefully.
In this article, we look at the size standards that apply to small businesses located in the US. SBA is responsible for establishing and reviewing small business size standards in USA. Size criteria could be
- Number of employees or
- Value of annual receipts.
The standards also vary from industry to industry.
Meaning of Small Business Size Standard
To be classified as a small business, a business along with all its affiliates must not grow beyond the small business size standard. Note the qualification about affiliates. For determining whether a business unit is small business, all its affiliates are also considered. The issue of affiliates is discussed later.
Current size standards are listed in the Table of Small Business Size Standards. The industry classification adopted in the table is along the lines of North American Industry Classification System (NAICS).
Annual receipts and number of employees are the criteria used for checking whether a business is a small business.
Annual receipts mean gross receipts averaged over the latest three completed years. If the small business has been in existence for a lesser period, average weekly revenue is multiplied by 52 to arrive at annual receipts. The following kinds of receipts are excluded for this purpose:
- Capital gains and losses;
- Taxes collected and remitted to taxing authorities; and
- Amounts collected on behalf of others by a few industries such as Travel, Advertising Agents, etc.
Number of employees is computed by averaging number of persons employed for each pay period during latest 12 months. If the small business was in existence for a shorter period, this shorter period is considered.
All persons on payroll, whether part time or temporary, are included in the computation.
Widely used size standards are:
- 500 employees for most manufacturing and mining industries; and
- $6.0 million in average annual receipts for non-manufacturing industries.
Many exceptions exist and you must check the Table of Small Business Size Standards available here for the small business size standard applicable to your particular industry. The number of employees could be 750 or 1000 or even 1500 in a few cases and the business could still be a small business. And average annual receipts could go up to $30 million in some service industries.
Small Business Concern
To be eligible for small business assistance, the small business concern must be:
- Independently owned and operated; and
- Not dominant in its field of operation.
The small business concern must also be a business organized for profit, with its place of business in the US. It must operate primarily in the US, or contribute significantly to US economy by paying taxes, using US products, materials or labor.
Small Business Including Affiliates
While computing annual receipts or number of employees, all the affiliated businesses are considered. If the aggregated entity does not qualify as a small business, the constituents also do not.
For this purpose, any firm is considered to be under your control (and hence your affiliate) if you:
- Have over 50% or more of ownership; or
- Manage it under a contract; or
- Have a high shareholding compared to other shareholders and could exercise management control.
If the same individual, or group of individuals exercise effective control over different firms under one of the above means, all the firms are aggregated to compute annual income or number of employees. All the firms need not be in the same business.
The objective is to prevent an individual or group setting up a number of different firms to claim small business benefits for each separately.
Even a temporary association in the nature of a joint venture might result in the contracting firms being aggregated together.
Small Business Assistance
The topic of different kinds of assistance available to small business in the US is discussed separately in the article Starting A Small Business. We look at the programs only briefly here.
If you have a small business project that has good potential for success, but is unable to get funding on commercial terms, SBA would provide a guarantee to the lender. The latter would then be more willing to extend the loan.
One of SBA’s responsibilities is to insure that a fair portion of total purchases by Government is placed with small business enterprises. Federal contracts might be specifically designated for bidding by small business concerns only. Credits are given to prime contractors for extending subcontracting opportunities to small businesses.
Extensive counseling and support programs are available from SBA to small businesses. These include management and technical assistance to very small units.
Contracting preferences are available to small businesses located in HUB Zones requiring economic stimulation. To avail these, your small business must hire employees living in the zone.
SBA does not issue certificates to small businesses meeting size standards. Nor does it maintain a list of eligible small businesses.
Instead, the organization seeking assistance self-certifies that it meets the small business size standard requirements. However, any interested party could contest the self-certification.
Small Business Size Standards Are Subject to Review and Revision
The Office of Size Standards at SBA has the power to change the small business size standards. Requests for this purpose could be addressed to the Assistant Administrator.
The structure of the industry and impact of a size standard on federal procurement are important factors considered during a review.