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Small business

A small business is a privately owned corporation, partnership, or sole proprietorship. Many small businesses have fewer than 20 employees. At the top end, a “small business” may have up to 1,500 employees, depending on its industry.

What is a small business?

According to the U.S. Small Business Administration (SBA), the definition of a small business is based on its average annual receipts (total income plus cost of goods sold), the number of employees, and any business affiliates. This designation is important when applying for SBA business loans and bidding on contracts with federal agencies.

To be designated a "small business" by the SBA, a company must be an independently owned and operated, for-profit American business. Additionally, it must be headquartered in the United States and do most of its business in the nation or otherwise contribute to its economic development.

What defines a small business?

Determining your business size is as easy as finding your North American Industry Classification System (NAICS) code and referencing the Small Business Association table of size standards. SBA's table will tell you your annual receipts or employee threshold.

Generally, the number of employees needed to qualify for small business status ranges from 1 to 1,500 and varies significantly based on the industry. A retail bakery, for example, needs to have fewer than 500 employees to be considered a small business. In comparison, many companies in the manufacturing sector can have up to 1,000-1,500 employees and still maintain the small business designation. 

plumbingHVAC, or electrical contractor is a small business if it has less than $19 million in average annual revenue. A building construction business must earn less than $45 million to qualify.

In real estate, residential property managers would qualify if they earn less than $12.5 million. Real estate agents and brokers and appraisers, on the other hand, would need to earn less than $15 million.

Many healthcare businesses, such as dentists, optometrists, and chiropractors, are also considered small businesses if they earn less than $9 million in annual earnings.

If you have any questions or are applying for a grant or contract, it's always best to reference the SBA table [PDF] with your NAICS code. Stay up-to-date on the official website, as the small business size standards can change.

Does your business qualify as a small business?

What is the difference between a small business and a regular business?

There is no official designation for a "regular" or "medium" business in the United States. Based on the SBA guidelines, there are only small and large businesses. As such, 99.9% of businesses registered in the United States are considered small businesses, according to the Small Business Association FAQ.

Many small businesses in the United States only have one employee, such as limited liability companies, 1099 independent contractors, and sole proprietorships. Across America, the average small business has 24.9 employees. Larger companies (even those with hundreds of employees) still meet this small business definition as long as they remain under the annual revenue amount or have fewer employees than the industry threshold.

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What insurance coverage do small businesses need?

The type of insurance that a small business needs depends on a number of factors, including the industry, the types of property and equipment used, the number of employees, and more.

Some small businesses will be fine with the standard general liability insurance, which is often mandatory depending on the state, while some will need special types of insurance to handle additional needs and risks. For example, cyber insurance is ideal for those who work primarily online or in the e-commerce space and handle sensitive information. Commercial property insurance is a must for entrepreneurs who own or rent their business space.

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The benefits of being a small business

Small businesses are often quicker to adapt to changes in technology in the marketplace than their larger business competitors. There are other advantages as well:

  • SBA loans make it easier for small businesses to borrow money and at a lower interest rate than they might receive on their own from lenders.
  • The SBA offers government contracts to small business owners. Many state and local governments set aside contracts for small businesses as well.
  • Small businesses may be eligible for grants. Offered by the federal government, Small Business and Innovation Research (SBIR) grants provide funding to small businesses for research and development that have commercial possibilities.
  • Small businesses are eligible for certain tax benefits and deductions, including the cost of business insurance.

What are the differences between a small business and a startup?

While startups may begin small, they’re not typically referred to as a “small business” because the owners don’t intend for them to stay that way for long.

A startup begins with an idea and a plan that could rapidly help it grow into a large business. It offers a new product or service, or a considerable improvement on one that already exists. The owners are looking to disrupt the marketplace and possibly create a new industry.

A small business starts with someone intent on meeting an already existing demand with a product or service already known to the marketplace. It might start as a part-time project by the owner, with the goal of the business owner eventually becoming self-employed full-time.

Whereas a startup might develop a new cell phone app or social media platform with the idea of selling it to the world, a small business would offer goods or services within a city or neighborhood. Startups begin with a high risk of failure but the potential for rapid growth and high profits within a few years. Small business owners look for a long and steady source of income.

Startups are likely to seek funding from venture capitalists, angel investors, crowdfunding, and an initial public offering (IPO). Small businesses may rely on their own savings, loans from family, their local bank, grants for local businesses, or loans backed by the SBA.

Knowing how business structures vary between one another is key in understanding your small business needs. Here are a few other comparisons:

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Updated: February 28, 2024

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